Author Topic: MMM 2016 Budget  (Read 51721 times)

Kathryn K.

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Re: MMM 2016 Budget
« Reply #150 on: May 24, 2017, 12:39:11 PM »
If MMM truly monetized the blog to its potential based on traffic, then it would look completely different. With his level of traffic, the blog income is relatively small. Very rarely do I feel like he's trying to sell me something other than whatever is going on in his head (the exception being stuff like PeerStreet, Betterment, etc.)


Since you admit that at least in some cases, the blog monetization has compromised his message, why did MMM monetize at all if he would have been truly ok living on $25K with no extras paid for as business expenses?

b/c if you're going to do something why not make some extra cash doing it if its possible.  also MMM didnt FIRE

he left his job to start building houses <-- career change
then the housing market colapsed.  <--- if this doesnt happen we may never know about him.  he may just keep building houses making a killing.
then the markets crashed. <---- butt hole pucker time.

anyone in that situation would likely be looking to bring in extra income if possible so he blogged and monetized it.

I don't disagree with your above sequence of history, but doesn't that also undercut that the message of "the 4% rule will see you through" that is a cornerstone of the MMM philosophy?

When one is basically preaching a philosophical system, not being consistent to it yourself is not the best way to get others to buy into it - especially when the philosophy itself promotes black and white thinking about its key concepts.

i 100% agree thats the side i'm on with the whole thing.  If he really wants to show this works every dime he makes should be given away.  (but who the hell is gonna do that)  the insurance is worth so much just to have that cash there for the healthcare what ifs the end of life what ifs.

it'd be really cool to see some one FIRE and 100% live on the 4% rule with a roth ladder and blog about it ... but when that happens and then it gets popular then it makes money and that money is now a safety net and you're no longer retired.  you see where this is going. its an infinite cycle.

That could be gotten around by a blog owner seeking out those who are FI but don't have a blog themselves (maybe this is already out there somewhere?). Would be more of one-off or occasional check-in but I think it would be extremely valuable to see how how the FIRE concepts play out when there's not a firehose of blog income as a back-up.  Of course there are FIRE'd forum members here but don't know how publicly some of them would want to share all their details.

threefive

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Re: MMM 2016 Budget
« Reply #151 on: May 24, 2017, 12:44:44 PM »
Me personally yes, but I don't go around telling people but that I have the one true way of living and you're a consumer sucka if you don't agree with me.

MMM has been all about how his ideals are more important than money so there seems to be some cognitive dissonance there. Would MMM really have used some of these things if there wasn't the potential payoff down the road? As an earlier poster said, there's now no way to be sure so it does dilute his message.

I guess it might dilute his "message" in some people's minds, but I think those people are getting the wrong message. What I've gotten from MMM is that you don't need a lot to live fancy, and you don't really get any more happiness or much more fancyness past a certain level of spending. His message is aimed at the six-figure set: after $40-50k of spending, you're really just accumulating useless stuff that doesn't make you happy. So stop, save, and quit working in 10 years. If you want true frugal blogging for the average salary family, then there are way better options than MMM.

I honestly get the impression that Pete is a dude that writes some shit in a computer, and he got lucky that it became popular. Once popular, he monetized because, why not? Then he probably got bored with doing too much of that. Now, he barely writes shit in a computer anymore, but when he does, it seems to be whatever happens to be swirling around in his head, which is different in many ways from several years ago.

First, like I said, there is very little monetization. Really, he has like the least monetization I think reasonably possible for a blog other than zero. He's SUPER lazy on that side. Second, this blog has some massive expenses you don't see. He is probably paying several thousand dollars a month in server costs and technical support (which, it seems, some would expect him to include in his "spending"). He needs some minimal amount of monetization to cover those costs. And that pretty much is what he has. The traffic is just so large that that minimal amount of lazy monetization covers costs AND makes extra bank. And then the asshole has the audacity to write six-figure checks to charities with some of that extra bank.

Accept it: Pete is some random rich guy that started writing some shit in a computer at just about the perfect time and got lucky. Some of that shit may work for you, some may not.

boarder42

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Re: MMM 2016 Budget
« Reply #152 on: May 24, 2017, 12:48:05 PM »
Me personally yes, but I don't go around telling people but that I have the one true way of living and you're a consumer sucka if you don't agree with me.

MMM has been all about how his ideals are more important than money so there seems to be some cognitive dissonance there. Would MMM really have used some of these things if there wasn't the potential payoff down the road? As an earlier poster said, there's now no way to be sure so it does dilute his message.

I guess it might dilute his "message" in some people's minds, but I think those people are getting the wrong message. What I've gotten from MMM is that you don't need a lot to live fancy, and you don't really get any more happiness or much more fancyness past a certain level of spending. His message is aimed at the six-figure set: after $40-50k of spending, you're really just accumulating useless stuff that doesn't make you happy. So stop, save, and quit working in 10 years. If you want true frugal blogging for the average salary family, then there are way better options than MMM.

I honestly get the impression that Pete is a dude that writes some shit in a computer, and he got lucky that it became popular. Once popular, he monetized because, why not? Then he probably got bored with doing too much of that. Now, he barely writes shit in a computer anymore, but when he does, it seems to be whatever happens to be swirling around in his head, which is different in many ways from several years ago.

First, like I said, there is very little monetization. Really, he has like the least monetization I think reasonably possible for a blog other than zero. He's SUPER lazy on that side. Second, this blog has some massive expenses you don't see. He is probably paying several thousand dollars a month in server costs and technical support (which, it seems, some would expect him to include in his "spending"). He needs some minimal amount of monetization to cover those costs. And that pretty much is what he has. The traffic is just so large that that minimal amount of lazy monetization covers costs AND makes extra bank. And then the asshole has the audacity to write six-figure checks to charities with some of that extra bank.

Accept it: Pete is some random rich guy that started writing some shit in a computer at just about the perfect time and got lucky. Some of that shit may work for you, some may not.

he has spent many blog posts trying to say its not aimed at this set and anyone can do it look at me on 25k.  not to say it doesnt work better for those of us with 6 figure salaries.
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Kathryn K.

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Re: MMM 2016 Budget
« Reply #153 on: May 24, 2017, 12:56:48 PM »
Me personally yes, but I don't go around telling people but that I have the one true way of living and you're a consumer sucka if you don't agree with me.

MMM has been all about how his ideals are more important than money so there seems to be some cognitive dissonance there. Would MMM really have used some of these things if there wasn't the potential payoff down the road? As an earlier poster said, there's now no way to be sure so it does dilute his message.

I guess it might dilute his "message" in some people's minds, but I think those people are getting the wrong message. What I've gotten from MMM is that you don't need a lot to live fancy, and you don't really get any more happiness or much more fancyness past a certain level of spending. His message is aimed at the six-figure set: after $40-50k of spending, you're really just accumulating useless stuff that doesn't make you happy. So stop, save, and quit working in 10 years. If you want true frugal blogging for the average salary family, then there are way better options than MMM.

I honestly get the impression that Pete is a dude that writes some shit in a computer, and he got lucky that it became popular. Once popular, he monetized because, why not? Then he probably got bored with doing too much of that. Now, he barely writes shit in a computer anymore, but when he does, it seems to be whatever happens to be swirling around in his head, which is different in many ways from several years ago.

First, like I said, there is very little monetization. Really, he has like the least monetization I think reasonably possible for a blog other than zero. He's SUPER lazy on that side. Second, this blog has some massive expenses you don't see. He is probably paying several thousand dollars a month in server costs and technical support (which, it seems, some would expect him to include in his "spending"). He needs some minimal amount of monetization to cover those costs. And that pretty much is what he has. The traffic is just so large that that minimal amount of lazy monetization covers costs AND makes extra bank. And then the asshole has the audacity to write six-figure checks to charities with some of that extra bank.

Accept it: Pete is some random rich guy that started writing some shit in a computer at just about the perfect time and got lucky. Some of that shit may work for you, some may not.

Believe me, I've accepted it. I am very happy with my Prius for example, but am not planning to move into town or start riding a bike down my rural gravel roads anytime soon.  However, since Pete puts himself out there as Mr. Money Mustache, the expert on frugal and optimized living, I am also free to call out where he is not consistent with what he himself espouses. This site seems to be all about critical thinking other than when it touches on MMM/Mustachianism itself.

Overall, I think it might be time for Pete to hang up his MMM cape rather than getting more and more convoluted in his justifications for spending (or he could always just be more honest about when he's not consistent with his own past statements).

prognastat

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Re: MMM 2016 Budget
« Reply #154 on: May 24, 2017, 01:01:38 PM »
Me personally yes, but I don't go around telling people but that I have the one true way of living and you're a consumer sucka if you don't agree with me.

MMM has been all about how his ideals are more important than money so there seems to be some cognitive dissonance there. Would MMM really have used some of these things if there wasn't the potential payoff down the road? As an earlier poster said, there's now no way to be sure so it does dilute his message.

I guess it might dilute his "message" in some people's minds, but I think those people are getting the wrong message. What I've gotten from MMM is that you don't need a lot to live fancy, and you don't really get any more happiness or much more fancyness past a certain level of spending. His message is aimed at the six-figure set: after $40-50k of spending, you're really just accumulating useless stuff that doesn't make you happy. So stop, save, and quit working in 10 years. If you want true frugal blogging for the average salary family, then there are way better options than MMM.

I honestly get the impression that Pete is a dude that writes some shit in a computer, and he got lucky that it became popular. Once popular, he monetized because, why not? Then he probably got bored with doing too much of that. Now, he barely writes shit in a computer anymore, but when he does, it seems to be whatever happens to be swirling around in his head, which is different in many ways from several years ago.

First, like I said, there is very little monetization. Really, he has like the least monetization I think reasonably possible for a blog other than zero. He's SUPER lazy on that side. Second, this blog has some massive expenses you don't see. He is probably paying several thousand dollars a month in server costs and technical support (which, it seems, some would expect him to include in his "spending"). He needs some minimal amount of monetization to cover those costs. And that pretty much is what he has. The traffic is just so large that that minimal amount of lazy monetization covers costs AND makes extra bank. And then the asshole has the audacity to write six-figure checks to charities with some of that extra bank.

Accept it: Pete is some random rich guy that started writing some shit in a computer at just about the perfect time and got lucky. Some of that shit may work for you, some may not.

he has spent many blog posts trying to say its not aimed at this set and anyone can do it look at me on 25k.  not to say it doesnt work better for those of us with 6 figure salaries.

Just because it isn't applicable to only that group doesn't mean those are the ones most aimed at by MMM.

Given his own life naturally his experience is based on his history making those incomes and the people around him like coworkers and neighbours that were probably achieving a similar income. Although a lot of the things he talks about can be applied at lower income levels or at least modified to work with lower incomes that doesn't mean his experience doesn't come from this perspective and is most applicable to people in a similar situation.

Pennycounter

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Re: MMM 2016 Budget
« Reply #155 on: May 24, 2017, 01:22:59 PM »
Very interesting to see everyone’s comments – and this is my first.

I have been following this and other FI blogs for the past 3 years and have made some of the major adjustments (downsized house, cheap cars) to accelerate FI and am super excited (I am 2 years away). That said, I think the numbers are simply bigger on both the assets required and the spending needed.

We (family of four) are quite big spenders (certainly compared to $30k) and my concern about when to retire have always hinged on;

1)   Realistic expectation of spend while still enjoying life (there is not a designer shoe, handbag, watch or the like to be seen in our house)
2)   Realistic return expectation on the investment portfolio

On both sides I have always found MMM substantially lower than I can see as realistic, at least for our family.

On 1) I have always had my suspicions of how achievable / joyful this lifestyle would be for us as there are so many things not included which would seriously test my relationship with wife and children if I cut out, noting of course that these would be considered great luxuries to 95% of the world but if we are all reading this that is perhaps not the relevant measure;

•   We live in the UK and I grew up skiing so want my 2 kids to experience this and you are going to drop $4k to get to France and ski for a week. The pass alone is $800 for the family for the week.
•   Housing is simply very expensive in the UK and I want to live near my family so kiss goodbye to at a very minimum $500k for the house (even after the 50% downsize – value wise).
•   Our kids friends live all over the place so we are racking up miles
•   My Dad lives in Florida and if we are to visit him during children's school holidays, say hello to a $3,000 air fare for the four of us.
•   We want to help out our two kids for college fees (average UK student debt at graduation $50k) or helping with first apartments for the kids. That is $10k additional ‘spend’ each year for the next 10.   

Be gentle as I can see true Moustacians sharpening their knives (but I could go on) and what is the option – tell my kids to only make local friends, tell them that I know I grew up going skiing but daddy wants to retire at 40 so tough luck, tell my dad sorry but we aren’t going to visit, saddle my kids with massive debt and thus impact their career choices (as it did me)? This has led me to some sort of Moustache ‘lite’ version which looks, perhaps ironically, much more like MMM spending this past year and something like a baseline something like $80,000 a year if you are free of mortgage and debt. I believe many of the ‘one off’ items in this 2016 budget are simply not (like many corporate accounts!) and would be replaced by other ‘one off’ items each year. For example, I seem to remember a blog entry where the beauty of FI was described by MMM as the ability to go to Florida for a month to escape the harsh winters in Colorado. A quick owners direct on that would tell you that is not a cheap endeavour.

On 2) I have always found the ‘how much do I need’ incredibly optimistic. I work in investments and I think it is quite risky that people have almost taken as gospel that the most impressive recent economy (US) and most impressive run in equity markets (US equities), leading to the highest P/E multiples in decades, is the model to base the next 30-years off of. So, you take a relatively generous 2.5% dividend yield, my $80,000 requirement and end up needing $2.8m unless you assume markets carry on getting more expensive. Admittedly, my calculation is probably too harsh but I would say to endlessly expect equities to compound at 7% is just fantasy.

Let me be clear, the overall the message is great and has led me to major changes in life, but to pick up what some others have said, I think MMM has somewhat retro-fitted the ‘Message’ to his life as though everything was planned when it was not (e.g. the fact he actually didn’t retire but instead set up a construction business). I am 40 and have c$2.0m in invested assets and very lucky to be a high earner. But I am in a job that I would not be able to pick up again once I walk away. If I get this wrong there is no turning back to my current level of earnings.

Throw all that in the mix and the calculation I get to is that the (hopefully) 40 years I have left would be better sticking to work for at least another 2 years, saving hard, be well above what FIRE devotees think is the right amount (and still be very young compared to most retirees). BUT not risk being 50 and not in the comfortable financial position I could be.

I totally agreed with your comments, very thoughtful.

MasterStache

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Re: MMM 2016 Budget
« Reply #156 on: May 24, 2017, 01:25:15 PM »
Man, to think we average $200/mo for our son's Boyscouts and my daughter is beginning competitive gymnastics which will cost roughly $300/mo plus travel. Guess it's time to switch to Ramen. Haha I kid.

I am still a fan of MMM's message. And it's inspired me (and my wifey unknowingly) to live a more frugal badass life. In fact I'm getting ready to call it quits from my full time cubicle job in a few weeks. Wouldn't be possible without the metaphorical face punches after stumbling on MMM a few years ago.  However, I have always taken his annual spending reports with a grain of salt. And comparing them to our own is utterly pointless.  I applaud MMM for being more transparent. So the message to me is still sound, so long as you mold it to your own lifestyle. But we can finally know that even MMM doesn't quite live on the 25K he's claimed to live on over the years.
« Last Edit: May 24, 2017, 01:29:57 PM by BeginnerStache »

MilesTeg

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Re: MMM 2016 Budget
« Reply #157 on: May 24, 2017, 01:56:29 PM »
MMM just doing what every other business person does. Leverage his businesses for personal reasons. Just because he chooses to spend money on things like foreign travel, eco-toys and other things instead of caviar and blow doesn't make it any less personal spending. While MMMs message is decent, he's always been less than honest about the realities.

boarder42

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Re: MMM 2016 Budget
« Reply #158 on: May 24, 2017, 02:23:48 PM »
This has been a frustrating thread for me, because on the one hand I want to call Mr Money Mustache out on his inconsistencies and hypocrises... but on the other hand, this nice, modest engineer in Colorado named Pete has had a hugely positive impact on my life.  There's some cognitive dissonance going on for me, and maybe I'm not the only one.

oh i'm on both sides of this.  i personally dont care what he does from my perspective my life is going to be better.

but from a big picture perspective and others seeing the light the inconsistencies and hiporcracies may drive those people away.
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NoraLenderbee

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Re: MMM 2016 Budget
« Reply #159 on: May 24, 2017, 02:29:08 PM »
When I buy a car, it's an expense, whether the car is new or used, cheap or fancy, ecological or a gas-guzzler. When I build a shed, it's an expense, whether I hire it out or build it myself out of scrap wood. The amount of the expense varies, but it still comes out of my stash/income, and it's still part of my spending.  MMM gets to claim he lives on 25K because he doesn't count as expenses things that you and I have to count.  It's like saying my grocery spending doesn't count because it's actually an investment in my health. I can call it an investment, but I still have to spend the money to survive.

Come to think of it, it's like saying I live on 1200 calories a day, when I actually eat 2000, because I just don't count dinner and dessert for some bullshit reason. ("I'm only eating it to make my mother happy! I'm definitely going to burn it off tomorrow!")
 

nereo

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Re: MMM 2016 Budget
« Reply #160 on: May 24, 2017, 03:09:12 PM »
When I buy a car, it's an expense, whether the car is new or used, cheap or fancy, ecological or a gas-guzzler. When I build a shed, it's an expense, whether I hire it out or build it myself out of scrap wood. The amount of the expense varies, but it still comes out of my stash/income, and it's still part of my spending.  MMM gets to claim he lives on 25K because he doesn't count as expenses things that you and I have to count.  It's like saying my grocery spending doesn't count because it's actually an investment in my health. I can call it an investment, but I still have to spend the money to survive.

Come to think of it, it's like saying I live on 1200 calories a day, when I actually eat 2000, because I just don't count dinner and dessert for some bullshit reason. ("I'm only eating it to make my mother happy! I'm definitely going to burn it off tomorrow!")
I'm not so sure - this is pretty much the same thing that's done when people refurbish their homes; some choose to list it as a one-time expense, while others (and in this case MMM) its seen as adding value to the eventual sale-price of the home.  The problem comes with the accounting - what's being done is a transfer of equity and the ultimate cost will only be known later. 

What would have happened if MMM had used a HELOC to build a $30k shed? Would that be an expense of $30k or would you simply total the payments made in FY2016? If the former then what happens the year you close on a rental house - is that a sudden one-time annual expense of $300k?  When you sell do you have an 'income' of $300k+? Of course not - you've made an investment, trading cash for a house.

This is why the concept of assets and liabilities comes about. If you pay to go to Hawai'i on a swanky vacation that money is gone. If you pay for a Leaf you have both a liability (something that neds insurance and upkeep) as well as an asset that can be sold for cash (in this example a depreciating asset). This of course is how people get into trouble though.  They buy a shed for $30k, hold it for 5 years and then sell it along with the house for $30k more than they paid - and think "that didn't cost me a thing!" It very well might have, in opportunity costs, with inflation, extra insurance and periodic upkeep.  But it also doesn't mean that a person spent $30k building it with nothing to show for it later.
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Classical_Liberal

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Re: MMM 2016 Budget
« Reply #161 on: May 24, 2017, 04:48:44 PM »
This is why the concept of assets and liabilities comes about. If you pay to go to Hawai'i on a swanky vacation that money is gone. If you pay for a Leaf you have both a liability (something that neds insurance and upkeep) as well as an asset that can be sold for cash (in this example a depreciating asset). This of course is how people get into trouble though.  They buy a shed for $30k, hold it for 5 years and then sell it along with the house for $30k more than they paid - and think "that didn't cost me a thing!" It very well might have, in opportunity costs, with inflation, extra insurance and periodic upkeep.  But it also doesn't mean that a person spent $30k building it with nothing to show for it later.

Yes, accounting gets murky! Not just in non-depreciating assets. If someone went on that swanky Hawaii trip and then wrote an article about the trip which was sold to a publication for the exact cost of the vacation, how do you account for that cash flow?  Does it matter what the original intent of the vacation was? If you enjoyed the vacation, enjoyed writing the article & would have done both no matter what, was it work? This is the dilemma of an FI person.  Is manufacturing the income to pay for the vacation through writing any different than juggling rewards credit cards to pay for it?  If so, should the rest of us count "imputed spending" for our rewards points usage?  or did we just design our life better than average to get free travel?

Out of the Blue

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Re: MMM 2016 Budget
« Reply #162 on: May 24, 2017, 06:53:47 PM »
Quote
This is why the concept of assets and liabilities comes about. If you pay to go to Hawai'i on a swanky vacation that money is gone. If you pay for a Leaf you have both a liability (something that neds insurance and upkeep) as well as an asset that can be sold for cash (in this example a depreciating asset). This of course is how people get into trouble though.  They buy a shed for $30k, hold it for 5 years and then sell it along with the house for $30k more than they paid - and think "that didn't cost me a thing!" It very well might have, in opportunity costs, with inflation, extra insurance and periodic upkeep.  But it also doesn't mean that a person spent $30k building it with nothing to show for it later.

The problem is the $25k figure does not include the $30k one-off cost of the shed or the cost of depreciation for the shed, or "imputed rent" for the shed.  It's like if in 2015 you paid upfront for the expenses for a holiday that you're going to take in 2016.  But then you don't account for it in 2015 because "I haven't taken the vacation yet", OR in 2016 because "It was paid for in the past!".  It's reasonable to account for it in either 2015 or 2016 - but you have to account for it at least once, that holiday expense shouldn't just disappear into thin air. 

Same goes for things like buying a house or building a shed - either you account for that expense on a cash basis in the year you bought it (e.g. -$30k in Year 1) or you account for it on an accrual basis using a calculation based on depreciation, imputed rent, or opportunity cost.

That's also why I think either an imputed rent or opportunity cost for his housing must be added in to show the full picture of his spending.  It looks like he spent less than my household of 2 if you take a $25k figure, but when you add in the imputed rent he actually spent quite a lot more.  He has given more information in this post to allow people to make those calculations, at least.     

I don't really have a problem with MMM spending more in retirement than in accumulation.  As others have pointed out, he still spends remarkably little on eating out and gas.  If I were in his position, I'd probably be spending as much as him, if not more.  But I do understand why people take issue with his accounting methods, and also see why it may be offputting to newcomers.

jim555

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Re: MMM 2016 Budget
« Reply #163 on: May 24, 2017, 09:32:14 PM »
I don't look at buying a house for cash as an expense, it is a transfer of assets from one form to another. 

Imputed rent is not a real cost, it is an opportunity cost.  I don't understand why it needs to be accounted for. 

undercover

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Re: MMM 2016 Budget
« Reply #164 on: May 24, 2017, 10:30:33 PM »
Four pages in and no mention of the fact that he bought a commercial building a few months ago.
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EnjoyIt

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Re: MMM 2016 Budget
« Reply #165 on: May 24, 2017, 10:39:54 PM »
Four pages in and no mention of the fact that he bought a commercial building a few months ago.

I guess that is under the section of investments/real estate and does not need to be included just as he did not include any extra purchases into VTI for 2016. The whole thing is blurry.

What else is interesting is that maybe Mrs MM is a bit bored and needs something productive to do.  Maybe ER is not all its cracked up to be.
« Last Edit: May 24, 2017, 10:41:39 PM by EnjoyIt »

undercover

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Re: MMM 2016 Budget
« Reply #166 on: May 24, 2017, 10:41:25 PM »
Four pages in and no mention of the fact that he bought a commercial building a few months ago.

I guess that is under the section of investments/real estate and does not need to be included just as he did not include any extra purchases into VTI for 2016.

Really? From what I've read he doesn't plan on renting it out or starting a business. It's simply dubbed "MMM HQ". I would thus far consider the shed more of an investment than the building.
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EnjoyIt

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Re: MMM 2016 Budget
« Reply #167 on: May 24, 2017, 10:44:31 PM »
Four pages in and no mention of the fact that he bought a commercial building a few months ago.

I guess that is under the section of investments/real estate and does not need to be included just as he did not include any extra purchases into VTI for 2016.

Really? From what I've read he doesn't plan on renting it out or starting a business. It's simply dubbed "MMM HQ". I would thus far consider the shed more of an investment than the building.

i thought it was for the wife's jewelry store? Maybe I misread or misunderstood.

boarder42

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Re: MMM 2016 Budget
« Reply #168 on: May 25, 2017, 04:20:28 AM »
Four pages in and no mention of the fact that he bought a commercial building a few months ago.

I've mentioned it a couple times
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MasterStache

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Re: MMM 2016 Budget
« Reply #169 on: May 25, 2017, 05:31:10 AM »
Four pages in and no mention of the fact that he bought a commercial building a few months ago.

I've mentioned it a couple times

In the comments section, MMM states it was purchased in 2017. And he plans on turning a modest profit on it??? So again, probably won't count towards 2017 spending.

When I buy a car, it's an expense, whether the car is new or used, cheap or fancy, ecological or a gas-guzzler. When I build a shed, it's an expense, whether I hire it out or build it myself out of scrap wood. The amount of the expense varies, but it still comes out of my stash/income, and it's still part of my spending.  MMM gets to claim he lives on 25K because he doesn't count as expenses things that you and I have to count.  It's like saying my grocery spending doesn't count because it's actually an investment in my health. I can call it an investment, but I still have to spend the money to survive.

Come to think of it, it's like saying I live on 1200 calories a day, when I actually eat 2000, because I just don't count dinner and dessert for some bullshit reason. ("I'm only eating it to make my mother happy! I'm definitely going to burn it off tomorrow!")
I'm not so sure - this is pretty much the same thing that's done when people refurbish their homes; some choose to list it as a one-time expense, while others (and in this case MMM) its seen as adding value to the eventual sale-price of the home.  The problem comes with the accounting - what's being done is a transfer of equity and the ultimate cost will only be known later. 

We refurbished our home and it's increased the value substantially. However, every bit of it was counted as an expense. I do keep it in a separate column apart from normal regular spending because much of it is a one time expense. I also count mortgage principle payment. Essentially I count everything weather it's an asset or a liability. It's money that comes out of our pockets.

Adram

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Re: MMM 2016 Budget
« Reply #170 on: May 25, 2017, 07:15:34 AM »
I wouldn't have included the shed either. It's not an expense, it's capital spending. We live on about 30K per year, and when i added on a pergola and paved the backyard for 20K all up cost that didn't go in the expenses, it went into the balance sheet as as addition to the house. Pretty basic accountancy. My expenses didn't suddenly become 50K for the year.

I really don't see the problem with MMM posting only his personal expenses, and adding notes that he also spent money on x, y, and z which werent included above for such and such a reason. He proved he could live on 25K early on in the piece, and he's still pretty frugal considering his circumstances.

Seems like a fair bit of jealously, and nitpicking whining in this thread. Oh, no, new people might get the wrong idea... Yeah sure you are worried about new people, you just want a reason to cry your eyes out.

Chris22

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Re: MMM 2016 Budget
« Reply #171 on: May 25, 2017, 07:52:49 AM »
I wouldn't have included the shed either. It's not an expense, it's capital spending. We live on about 30K per year, and when i added on a pergola and paved the backyard for 20K all up cost that didn't go in the expenses, it went into the balance sheet as as addition to the house. Pretty basic accountancy. My expenses didn't suddenly become 50K for the year.

It is pretty basic accountancy for a business because they invest in income-generating assets that they capitalize.  Your pergola and backyard are not income-generating assets.  You may someday receive a return on the money spent*, but highly unlikely it's a 1:1 return, and it will be way less than any other sort of investment (mutual fund, stock, etc barring a market collapse).  You expenses did, in fact, become $50k for THAT year (you spent $50k, didn't you?), but it doesn't affect your "baseline spending".  Problem is, if you base your needed nest egg on only your baseline spend, you are essentially saying you will never have these "one-time charges" again, so unless you over-save, you will be unable to service them.  Not being able to build a pergola is not a big deal, but what if it's a new roof or furnace or something similar?  In my own spending, I find I have a "one time expense" almost every year; not the same expense, but an expense.  A new furnace, surgery for the dog, an unexpected medical bill, large car repair, last minute plane tickets for a family emergency, etc etc.  There's always SOMETHING.

*I laugh at MMM's expectation that because houses in his neighborhood go for $300sq ft, his shed is also worth $300sq ft.  It's not.  In fact for some people it may be a detractor rather than a benefit. 
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MasterStache

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Re: MMM 2016 Budget
« Reply #172 on: May 25, 2017, 07:58:31 AM »
We live on about 30K per year, and when i added on a pergola and paved the backyard for 20K all up cost that didn't go in the expenses, it went into the balance sheet as as addition to the house. Pretty basic accountancy. My expenses didn't suddenly become 50K for the year.

Except actually they did. Total money out of your pocket was 50K, not 30K. You can't exclude an expense because you believe it adds value. How much value? How much value when you sell the house? What if the patio crumbles and the Pergola is deteriorated? Does it still add value? What about long term maintenance cost?



   
« Last Edit: May 25, 2017, 08:02:04 AM by BeginnerStache »

lemonlyman

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Re: MMM 2016 Budget
« Reply #173 on: May 25, 2017, 08:30:35 AM »
I wouldn't count the shed as a regular expense either because it's not one. If only the statement of cash flows mattered, then yeah, but that's not how accounting works. The shed goes on the balance sheet as an asset. If you didn't account for assets or liabilities, then taking debt wouldn't mean anything to your finances, only cash in and cash out would matter. Might as well lease everything. You can't factor one and not the other. Balance sheets do matter in personal finance; it's net worth.

Raenia

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Re: MMM 2016 Budget
« Reply #174 on: May 25, 2017, 08:36:52 AM »
Seems like a fair bit of jealously, and nitpicking whining in this thread. Oh, no, new people might get the wrong idea... Yeah sure you are worried about new people, you just want a reason to cry your eyes out.

This is a real problem though.  I said myself earlier in the thread that it was posts like this that convinced me what he was 'selling' was snake oil and would never work.  I closed the browser without getting through all the meat of the better articles and realizing the math really does work.  It took years before I was willing to come back and give the blog another chance, starting with the oldest posts instead of the newer ones this time.  I certainly wouldn't blame anyone for never coming back - I almost didn't.  That's five years of my life I don't get to redo, because representing his spending in this way undermined the validity of the method to me.

Chris22

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Re: MMM 2016 Budget
« Reply #175 on: May 25, 2017, 08:46:53 AM »
I wouldn't count the shed as a regular expense either because it's not one. If only the statement of cash flows mattered, then yeah, but that's not how accounting works. The shed goes on the balance sheet as an asset. If you didn't account for assets or liabilities, then taking debt wouldn't mean anything to your finances, only cash in and cash out would matter. Might as well lease everything. You can't factor one and not the other. Balance sheets do matter in personal finance; it's net worth.

Again, a shed is not an income-generating asset, and I can pretty much guarantee it is worth less than the $30k he spent on it.  It would be like me going out and buying a $1k TV and then claiming I didn't "spend" because I now have this $1k asset.  Everyone and their brother would call bullshit on that, and rightly so.  I MIGHT have a $500 asset. 
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MasterStache

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Re: MMM 2016 Budget
« Reply #176 on: May 25, 2017, 08:55:03 AM »
I wouldn't count the shed as a regular expense either because it's not one. If only the statement of cash flows mattered, then yeah, but that's not how accounting works. The shed goes on the balance sheet as an asset. If you didn't account for assets or liabilities, then taking debt wouldn't mean anything to your finances, only cash in and cash out would matter. Might as well lease everything. You can't factor one and not the other. Balance sheets do matter in personal finance; it's net worth.

It's been beaten to death. It doesn't matter if it's a one time expense.  Life is full of those. A roof replacement will add value to your home. Is it not an expense then? Of course it's an expense. Yearly expenses aren't broken down based on what counts as an asset and what counts as a liability. I mean you could do that, but it seems rather pointless. Heck our spending is extremely low if I deduct what I deem an asset (house renovation cost, workout equipment, etc. etc.)

If you are FIRE, it's even more relevant. You could be claiming to live on 25K per year while technically spending 90K (65K goes into what you deem as "assets"). If 4% dictates you should be spending roughly 25K/year, you will run out of money real quick.


lemonlyman

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Re: MMM 2016 Budget
« Reply #177 on: May 25, 2017, 08:55:35 AM »
Again, a shed is not an income-generating asset, and I can pretty much guarantee it is worth less than the $30k he spent on it.  It would be like me going out and buying a $1k TV and then claiming I didn't "spend" because I now have this $1k asset.  Everyone and their brother would call bullshit on that, and rightly so.  I MIGHT have a $500 asset.

A house isn't income generating either, but it has value. I wouldn't say the TV is the same at all. A technology is a rapidly depreciating asset, but it is an asset. The shed+house CAN appreciate over a long period of time. Unless the TV becomes some kind of collectors item in decades, it never will. Having said that, nothing is guaranteed 1:1 for value. Saying the market will always appreciate or return good dividends is a fallacy. It's just likely that it will.

Adram

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Re: MMM 2016 Budget
« Reply #178 on: May 25, 2017, 08:56:56 AM »

It is pretty basic accountancy for a business because they invest in income-generating assets that they capitalize.  Your pergola and backyard are not income-generating assets.  You may someday receive a return on the money spent*, but highly unlikely it's a 1:1 return, and it will be way less than any other sort of investment (mutual fund, stock, etc barring a market collapse).  You expenses did, in fact, become $50k for THAT year (you spent $50k, didn't you?), but it doesn't affect your "baseline spending".  Problem is, if you base your needed nest egg on only your baseline spend, you are essentially saying you will never have these "one-time charges" again, so unless you over-save, you will be unable to service them.  Not being able to build a pergola is not a big deal, but what if it's a new roof or furnace or something similar?  In my own spending, I find I have a "one time expense" almost every year; not the same expense, but an expense.  A new furnace, surgery for the dog, an unexpected medical bill, large car repair, last minute plane tickets for a family emergency, etc etc.  There's always SOMETHING.

*I laugh at MMM's expectation that because houses in his neighborhood go for $300sq ft, his shed is also worth $300sq ft.  It's not.  In fact for some people it may be a detractor rather than a benefit.

Whether housing is an income producing asset is irrelevant to whether it's an expense or a capital improvement. what about the imputed rental income, if you want to make that argument? Rental property capital works are not expensed in the year they are done.

Therefore my expenses didn't become $50K, although my spending did, in a way. In fact it was mostly on interest free credit cards, so spending could be said to be nil at that point, just debit asset, credit liability 😃

You have a point about the regular one time expenses, but i'm not gonna be building a pergola again, and any repairs will be expensed. This was something that we took into account when we bought the house, so really its part of the house purchase... Which i don't think was an expense either.


Chris22

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Re: MMM 2016 Budget
« Reply #179 on: May 25, 2017, 09:00:30 AM »
Again, a shed is not an income-generating asset, and I can pretty much guarantee it is worth less than the $30k he spent on it.  It would be like me going out and buying a $1k TV and then claiming I didn't "spend" because I now have this $1k asset.  Everyone and their brother would call bullshit on that, and rightly so.  I MIGHT have a $500 asset.


A house isn't income generating either, but it has value. I wouldn't say the TV is the same at all. A technology is a rapidly depreciating asset, but it is an asset. The shed+house CAN appreciate over a long period of time. Unless the TV becomes some kind of collectors item in decades, it never will. Having said that, nothing is guaranteed 1:1 for value. Saying the market will always appreciate or return good dividends is a fallacy. It's just likely that it will.

A house has a measurable market value (to an extent), can be borrowed against, etc etc.  A shed, not so much.  I look at it the same as if he decided to redo his kitchen or bathroom.  You're adding some theoretical value to the house, but it is almost certainly less than what you spent, and unless you turn around and sell the house right away after doing the remodeling, you're not engaging in an income-producing activity.  You're spending money. 
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tooqk4u22

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Re: MMM 2016 Budget
« Reply #180 on: May 25, 2017, 09:09:02 AM »
One thing to remember about the shed is that the expense really a part of MMM's sale of his old house and moving into a new, smaller one.  He sold the old house for about $400k, bought the new one for $240k and spent about $60k renovating it with the express intention to make up some of the space he lost in the downsizing by constructing an outbuilding.  From the articles it sounds like he's gotten a house that's more energy efficient, has spaces that work better for he and his family, and freed up about $70,000 ($400k from the old house, vs $330 to buy the new house, renovate it, and build the shed).  Sounds pretty mustachian to me.

I think its mixed....sure it is from surplus capital from the old house so that makes it ok.  Although your numbers are a bit off (we don't have the full numbers) - that article did say they bought it for $240k (no mention of transaction costs) and there were estimated carrying costs of about $6k from the time they bought it to the time when they expected to move into it, and then an estimated $60k for renovations (quoted as...."this is on the very high end of possible costs") - in the spending report for 2014 he said he had spent about $80k to date and still had work to go.  Plus his taxes went up this year, which is not just because the market appreciated (that's not how it works entirely) but because he improved the house - so that savings ended up being false as well.  Then he spent $30k on the out building.   So $240k + $6k +$80k (or more) + $30k = $44k surplus left from old house not factoring in many additional other costs (or valuing any labor on his part for doing it himself).

I am perfectly fine with recycling capital into something that is better suited especially if on a net cost is equal or less, but would be ok to me if it was a bit more too.


lemonlyman

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Re: MMM 2016 Budget
« Reply #181 on: May 25, 2017, 09:14:43 AM »

It's been beaten to death. It doesn't matter if it's a one time expense.  Life is full of those. A roof replacement will add value to your home. Is it not an expense then? Of course it's an expense. Yearly expenses aren't broken down based on what counts as an asset and what counts as a liability. I mean you could do that, but it seems rather pointless. Heck our spending is extremely low if I deduct what I deem an asset (house renovation cost, workout equipment, etc. etc.)

If you are FIRE, it's even more relevant. You could be claiming to live on 25K per year while technically spending 90K (65K goes into what you deem as "assets"). If 4% dictates you should be spending roughly 25K/year, you will run out of money real quick.

Beaten to death or not, it does matter because that's how accounting works. If you sell your house and recoup the value of the roof then no, it wasn't an expense. It's not like going out and buying groceries. There is no way to see that money back after consumption, ever. Of course, no one should ever buy a $30,000 shed if they only have the resources for $25,000 a year and no wiggle room to cut spending. He traded $30,000 cash for a $30,000 asset because he has enough resources to do that. If you get in hard times, you CAN sell the house and possibly get your money back. That's way different than a regular expense.



A house has a measurable market value (to an extent), can be borrowed against, etc etc.  A shed, not so much.  I look at it the same as if he decided to redo his kitchen or bathroom.  You're adding some theoretical value to the house, but it is almost certainly less than what you spent, and unless you turn around and sell the house right away after doing the remodeling, you're not engaging in an income-producing activity.  You're spending money. 

The shed is a part of the whole property now. The property is what is appraised and can be borrowed against. You don't just sell the shed. Based on the pictures he posted, it looks like finished space and would be included in the sqft of the appraised livable property. He could AirBnB it if he needed to.

« Last Edit: May 25, 2017, 09:25:34 AM by lemonlyman »

tyort1

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Re: MMM 2016 Budget
« Reply #182 on: May 25, 2017, 09:25:50 AM »
I wouldn't have included the shed either. It's not an expense, it's capital spending. We live on about 30K per year, and when i added on a pergola and paved the backyard for 20K all up cost that didn't go in the expenses, it went into the balance sheet as as addition to the house. Pretty basic accountancy. My expenses didn't suddenly become 50K for the year.

I really don't see the problem with MMM posting only his personal expenses, and adding notes that he also spent money on x, y, and z which werent included above for such and such a reason. He proved he could live on 25K early on in the piece, and he's still pretty frugal considering his circumstances.

Seems like a fair bit of jealously, and nitpicking whining in this thread. Oh, no, new people might get the wrong idea... Yeah sure you are worried about new people, you just want a reason to cry your eyes out.

Agreed.
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Spitfire

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Re: MMM 2016 Budget
« Reply #183 on: May 25, 2017, 09:29:35 AM »
I wouldn't have included the shed either. It's not an expense, it's capital spending.

This is true. An improvement like that would be added to the tax basis of the home. Whether it increases the property value more or less than the $30k he spent makes it a good or bad investment, but it's an investment either way.

secondcor521

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Re: MMM 2016 Budget
« Reply #184 on: May 25, 2017, 09:43:19 AM »
it'd be really cool to see some one FIRE and 100% live on the 4% rule with a roth ladder and blog about it ... but when that happens and then it gets popular then it makes money and that money is now a safety net and you're no longer retired.  you see where this is going. its an infinite cycle.

That could be gotten around by a blog owner seeking out those who are FI but don't have a blog themselves (maybe this is already out there somewhere?). Would be more of one-off or occasional check-in but I think it would be extremely valuable to see how how the FIRE concepts play out when there's not a firehose of blog income as a back-up.  Of course there are FIRE'd forum members here but don't know how publicly some of them would want to share all their details.

I sorta fit the bill.

I retired a little over a year ago at age 46.  I generally keep expenses under 4%.  I am using a Roth ladder.

I have no blog and doubt I'll ever start one, so I will have no firehose of income.  I do have a journal here titled "February 19, 2016" in which I document my transition to FIRE.

My general rule on sharing is that I'll share stuff on the expenses side of the cash flow statement.  I don't explicitly discuss assets or income, although I speak in generalities about SWR% that could give someone a rough idea.

My blog would be boring, though.  I got a college degree in a good field that I'm good at, worked at several good companies that paid well, got an MBA through my employer, then worked as a manager and saved a lot over the last 10 years into the stock market which did well, using tax-preferred investments to the extent possible.  I bought a reasonable home and paid it off in 8 years, refinancing three times as interest rates dropped.  I looked at my expenses and pay for stuff I value and don't pay for stuff I don't value.

The IRP might quibble with me over my non-portfolio income:  I do credit card piggybacking.  I collect rent from my oldest kid, mostly to give him some incentive to leave the nest.  My Dad gifts me money and trips because he wants to and I appreciate it.  But I don't count these incomes in my SWR%.  I fully admit that the trips that I go on with my Dad cut down on my desire to do more international travel.

People might also quibble with me about how I account for two facets of spending that I do on my kids:

1.  I have child support payments that will end in 1,101 days.  I subtract these payments out of my spending, but I also maintain a liability representing the NPV of those payments which I subtract from my FIRE stash before calculating my SWR.  (At this point this NPV is only about 3% of my FIRE stash anyway, so it's a relatively small adjustment.)

2.  I have kid educational expenses (private high school and college).  I have accounts (529's and ESA's) that fund the vast majority of these expenses as I predict them to be.  These accounts are separate and are not included in my FIRE stash.

I don't own a Leaf or a $30K outbuilding, though, so I got that going for me.
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Kathryn K.

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Re: MMM 2016 Budget
« Reply #185 on: May 25, 2017, 09:47:51 AM »
I wouldn't count the shed as a regular expense either because it's not one. If only the statement of cash flows mattered, then yeah, but that's not how accounting works. The shed goes on the balance sheet as an asset. If you didn't account for assets or liabilities, then taking debt wouldn't mean anything to your finances, only cash in and cash out would matter. Might as well lease everything. You can't factor one and not the other. Balance sheets do matter in personal finance; it's net worth.

This is more personal finance than business accounting, and as mentioned above since these aren't assets that will be immediately (if ever) producing income. So okay, cash flow isn't the *only* thing that matters, but it definitely matters. 

It's kind of tough to survive even if you have a fancy house with shed, pergola, or what have you if you don't have enough cash to buy groceries, keep the lights on, and pay taxes.  For example, farmers often are "land rich" (high net worth) but cash poor and that is not a fun way to live.

Kathryn K.

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Re: MMM 2016 Budget
« Reply #186 on: May 25, 2017, 09:49:57 AM »
We live on about 30K per year, and when i added on a pergola and paved the backyard for 20K all up cost that didn't go in the expenses, it went into the balance sheet as as addition to the house. Pretty basic accountancy. My expenses didn't suddenly become 50K for the year.

Except actually they did. Total money out of your pocket was 50K, not 30K. You can't exclude an expense because you believe it adds value. How much value? How much value when you sell the house? What if the patio crumbles and the Pergola is deteriorated? Does it still add value? What about long term maintenance cost?

 

+1

lemonlyman

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Re: MMM 2016 Budget
« Reply #187 on: May 25, 2017, 10:01:58 AM »

This is more personal finance than business accounting, and as mentioned above since these aren't assets that will be immediately (if ever) producing income. So okay, cash flow isn't the *only* thing that matters, but it definitely matters. 

It's kind of tough to survive even if you have a fancy house with shed, pergola, or what have you if you don't have enough cash to buy groceries, keep the lights on, and pay taxes.  For example, farmers often are "land rich" (high net worth) but cash poor and that is not a fun way to live.

Cash flow, income, and net worth all matter. I was just trying to say that buying a finished studio is different than consumption. People riding the line obviously shouldn't do that. He's rich and can afford to do that. So it goes with the assets of his net worth. It's not a regular expense. That's all. It's disingenuous to say all money out is equal when it's not and then apply his behavior to someone who only has enough to get by.

Chris22

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Re: MMM 2016 Budget
« Reply #188 on: May 25, 2017, 10:09:17 AM »
It's disingenuous to say all money out is equal when it's not and then apply his behavior to someone who only has enough to get by.

But it's also disingenuous (more so IMO) to brag about your super-luxurious lifestyle on $25k a year when a bunch of the stuff that makes it super-luxurious is not included in that $25k.
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MoseyingAlong

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Re: MMM 2016 Budget
« Reply #189 on: May 25, 2017, 10:11:19 AM »
I've really enjoyed this discussion and the different takes on his post.

One of the things that strikes me is that usually MMM seems very clear-eyed about reality. But when it comes to his spending reports, he seems to fall into the same trap that many new, naive, sometimes "delusional" business owners fall into. Discounting personal spending because it's a "business expense" or "tax-deductible." This is less critical when you're profitable but still a bad habit.

How many people write off their Starbucks habit or restaurant meals because they were "working" or meeting with clients without factoring in that they will still have a coffee habit and eat out with friends if/when the business ends? Same with people who get a new car every couple years to "maintain their professional image;" that's a pattern they are apt to continue.

I don't have a great solution. One might be to have a budget line item "Personal expenses paid by business" such as the 50% of meals and entertainment that are not tax-deductible.  Just something to remind yourself that the business is subsidizing your personal spending.

Kathryn K.

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Re: MMM 2016 Budget
« Reply #190 on: May 25, 2017, 10:16:52 AM »

This is more personal finance than business accounting, and as mentioned above since these aren't assets that will be immediately (if ever) producing income. So okay, cash flow isn't the *only* thing that matters, but it definitely matters. 

It's kind of tough to survive even if you have a fancy house with shed, pergola, or what have you if you don't have enough cash to buy groceries, keep the lights on, and pay taxes.  For example, farmers often are "land rich" (high net worth) but cash poor and that is not a fun way to live.

Cash flow, income, and net worth all matter. I was just trying to say that buying a finished studio is different than consumption. People riding the line obviously shouldn't do that. He's rich and can afford to do that. So it goes with the assets of his net worth. It's not a regular expense. That's all. It's disingenuous to say all money out is equal when it's not and then apply his behavior to someone who only has enough to get by.

What is the bright line between buying an asset (which you consider the studio to be, but others do not necessarily) and consumption? It's cash you no longer have in either case.  Your distinction seems to be that MMM can afford it, which is not a point anyone in this thread is disputing. 

Chris22

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Re: MMM 2016 Budget
« Reply #191 on: May 25, 2017, 10:19:30 AM »
One of the things that strikes me is that usually MMM seems very clear-eyed about reality. But when it comes to his spending reports, he seems to fall into the same trap that many new, naive, sometimes "delusional" business owners fall into. Discounting personal spending because it's a "business expense" or "tax-deductible." This is less critical when you're profitable but still a bad habit.

He's got some very strong biases, to which he is entitled, but he holds a lot of things to different standards.  One of his biggest "tricks" is taking expenses he doesn't approve of, and projecting them out for 10 years, plus theoretical market gains, to come up with a very big number.  "Oh, you have cable?  At $100/mo times 10 years that's $12,000 plus theoretical market returns of, I dunno, 40% after compounding, you've spent $16,800 on cable TV!!!"  Yeah, got it.  But how about applying that same logic to some of MMM's spending.  What that shed cost him over 10 years including opportunity costs, even subtracting a theoretical resale? 

It's always been the tortured math that really gets to me, even when I fundamentally agree with the message.
"If I could get all the money back I ever spent on cars, I'd spend it on cars." - Nick Mason

MasterStache

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Re: MMM 2016 Budget
« Reply #192 on: May 25, 2017, 10:26:15 AM »

This is more personal finance than business accounting, and as mentioned above since these aren't assets that will be immediately (if ever) producing income. So okay, cash flow isn't the *only* thing that matters, but it definitely matters. 

It's kind of tough to survive even if you have a fancy house with shed, pergola, or what have you if you don't have enough cash to buy groceries, keep the lights on, and pay taxes.  For example, farmers often are "land rich" (high net worth) but cash poor and that is not a fun way to live.

Cash flow, income, and net worth all matter. I was just trying to say that buying a finished studio is different than consumption. People riding the line obviously shouldn't do that. He's rich and can afford to do that. So it goes with the assets of his net worth. It's not a regular expense. That's all. It's disingenuous to say all money out is equal when it's not and then apply his behavior to someone who only has enough to get by.

What is the bright line between buying an asset (which you consider the studio to be, but others do not necessarily) and consumption? It's cash you no longer have in either case.  Your distinction seems to be that MMM can afford it, which is not a point anyone in this thread is disputing.

I think you nailed it. It seems to be, if you can afford it (which MMM obviously can), then it's not an expense. For someone say living on 4% of their stache (30K per year for example) and decides to drop down 30K on a shed, it suddenly is an expenditure that needs to be accounted for in the annual budget/expenses. They doubled their spending for the year. Whoops! Could spell disaster.   

mm1970

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Re: MMM 2016 Budget
« Reply #193 on: May 25, 2017, 10:29:41 AM »

It's been beaten to death. It doesn't matter if it's a one time expense.  Life is full of those. A roof replacement will add value to your home. Is it not an expense then? Of course it's an expense. Yearly expenses aren't broken down based on what counts as an asset and what counts as a liability. I mean you could do that, but it seems rather pointless. Heck our spending is extremely low if I deduct what I deem an asset (house renovation cost, workout equipment, etc. etc.)

If you are FIRE, it's even more relevant. You could be claiming to live on 25K per year while technically spending 90K (65K goes into what you deem as "assets"). If 4% dictates you should be spending roughly 25K/year, you will run out of money real quick.

Beaten to death or not, it does matter because that's how accounting works. If you sell your house and recoup the value of the roof then no, it wasn't an expense. It's not like going out and buying groceries. There is no way to see that money back after consumption, ever. Of course, no one should ever buy a $30,000 shed if they only have the resources for $25,000 a year and no wiggle room to cut spending. He traded $30,000 cash for a $30,000 asset because he has enough resources to do that. If you get in hard times, you CAN sell the house and possibly get your money back. That's way different than a regular expense.



A house has a measurable market value (to an extent), can be borrowed against, etc etc.  A shed, not so much.  I look at it the same as if he decided to redo his kitchen or bathroom.  You're adding some theoretical value to the house, but it is almost certainly less than what you spent, and unless you turn around and sell the house right away after doing the remodeling, you're not engaging in an income-producing activity.  You're spending money. 

The shed is a part of the whole property now. The property is what is appraised and can be borrowed against. You don't just sell the shed. Based on the pictures he posted, it looks like finished space and would be included in the sqft of the appraised livable property. He could AirBnB it if he needed to.

This is pretty much what I think.  And that's one of the reasons that all these websites for home improvement talk about how much you get back for each improvement.  Rarely is it more than 100%, but a typical kitchen remodel might add 75% of the value, for example.  That depends, of course, on who does the work.  I believe that most of the calculations assume you are paying for the work.

As an example, we paid $40k to have our backyard redone over a decade ago.  After it was done, we had an appraisal done (for tax purposes, yay), and it increased the value of our property by $30k.  (before the big crash whee!)  I'd assume that a backyard shed would be similar.  Our next door neighbor has one that he put in, and the value of his property is higher than ours for that reason.  (We have a storage shed, he has a shed with electrical that he uses as a home office.)

So it very well could be that the $30k shed is actually a $5k "expense" if it increases the value of his property by $25k.  But what if it increases the value of his property by $35k?

Chris22

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Re: MMM 2016 Budget
« Reply #194 on: May 25, 2017, 10:33:46 AM »

This is more personal finance than business accounting, and as mentioned above since these aren't assets that will be immediately (if ever) producing income. So okay, cash flow isn't the *only* thing that matters, but it definitely matters. 

It's kind of tough to survive even if you have a fancy house with shed, pergola, or what have you if you don't have enough cash to buy groceries, keep the lights on, and pay taxes.  For example, farmers often are "land rich" (high net worth) but cash poor and that is not a fun way to live.

Cash flow, income, and net worth all matter. I was just trying to say that buying a finished studio is different than consumption. People riding the line obviously shouldn't do that. He's rich and can afford to do that. So it goes with the assets of his net worth. It's not a regular expense. That's all. It's disingenuous to say all money out is equal when it's not and then apply his behavior to someone who only has enough to get by.

What is the bright line between buying an asset (which you consider the studio to be, but others do not necessarily) and consumption? It's cash you no longer have in either case.  Your distinction seems to be that MMM can afford it, which is not a point anyone in this thread is disputing.

I think you nailed it. It seems to be, if you can afford it (which MMM obviously can), then it's not an expense. For someone say living on 4% of their stache (30K per year for example) and decides to drop down 30K on a shed, it suddenly is an expenditure that needs to be accounted for in the annual budget/expenses. They doubled their spending for the year. Whoops! Could spell disaster.

But if you run a whole web site predicated on the idea that your life is better if you spend a lot less than you're able, don't be surprised when people bitch if you aren't really honest with how that spending translates to the good life.
"If I could get all the money back I ever spent on cars, I'd spend it on cars." - Nick Mason

lemonlyman

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Re: MMM 2016 Budget
« Reply #195 on: May 25, 2017, 11:02:38 AM »

What is the bright line between buying an asset (which you consider the studio to be, but others do not necessarily) and consumption? It's cash you no longer have in either case.  Your distinction seems to be that MMM can afford it, which is not a point anyone in this thread is disputing.

What is the dispute then? I'm arguing the difference between an asset and consumption which is pretty clear by definition and accounting standards. Whether he can afford it or not is not the distinction. An asset has residual value that can be turned back into cash. Consumable goods and services do not. That's a pretty clear distinction.

It is also an asset if someone without much cash reserves buys it. That's the way it works. Smart or not.
« Last Edit: May 25, 2017, 11:05:25 AM by lemonlyman »

SweetTPie

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Re: MMM 2016 Budget
« Reply #196 on: May 25, 2017, 11:03:38 AM »
My main 'issue' with his numbers is the car purchase.  Saying he only bought it because of the blog and thus not including it is disingenuous.  If the purpose was just for the blog, why not keep the old car, and work out some longer-than-normal-term rental on the Leaf?  That would be a business expense, generated solely for the blog.  To me, it seems like he wanted the new car, and found a way to justify the spending (for the blog!) and to justify leaving it out of the spending numbers (business!). 

I think MMM should count the new car as spending.  It's a single year thing, so if he wants to spread it out over 5 or 10 years, sure, we would grouse about predicting the future or accounting tricks, but at least it would be accounted for as spending, and not tucked down out of the way as a footnote.  He already takes the final number and subtracts out things to give a 'bare-bones' number, so why not add in the car purchase, then remove it too.

It's understandable that MMM wants to project spending as the ongoing routine categories and leave out the big isolated one-time expenses.  It makes it easier to track year-to-year, and comparisons are clearer.  However, so many expenses in life are large one-time expenses.  A renovation, a new car, a new roof- all are expenses, and should be treated as such.

FWIW, I had to buy a 'new' car this year.  (Yes, had to- the old one had an unfortunate incident involving a concrete highway barrier and a snowstorm.)  I account for this in my yearly spending, since, you know, I paid money for it.

lemonlyman

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Re: MMM 2016 Budget
« Reply #197 on: May 25, 2017, 11:07:43 AM »


I think you nailed it. It seems to be, if you can afford it (which MMM obviously can), then it's not an expense. For someone say living on 4% of their stache (30K per year for example) and decides to drop down 30K on a shed, it suddenly is an expenditure that needs to be accounted for in the annual budget/expenses. They doubled their spending for the year. Whoops! Could spell disaster.

Nope. It's still an asset. It's just if you did that, it was likely a mistake.

MasterStache

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Re: MMM 2016 Budget
« Reply #198 on: May 25, 2017, 11:14:01 AM »


I think you nailed it. It seems to be, if you can afford it (which MMM obviously can), then it's not an expense. For someone say living on 4% of their stache (30K per year for example) and decides to drop down 30K on a shed, it suddenly is an expenditure that needs to be accounted for in the annual budget/expenses. They doubled their spending for the year. Whoops! Could spell disaster.

Nope. It's still an asset. It's just if you did that, it was likely a mistake.

I said nothing about an asset.

lemonlyman

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Re: MMM 2016 Budget
« Reply #199 on: May 25, 2017, 11:16:25 AM »


I think you nailed it. It seems to be, if you can afford it (which MMM obviously can), then it's not an expense. For someone say living on 4% of their stache (30K per year for example) and decides to drop down 30K on a shed, it suddenly is an expenditure that needs to be accounted for in the annual budget/expenses. They doubled their spending for the year. Whoops! Could spell disaster.

Nope. It's still an asset. It's just if you did that, it was likely a mistake.

I said nothing about an asset.

What do you mean if you can afford it, it's not an expense, but if you can't afford it, then it is an expense? What do you call the "not expense". Either way, it's not an expense.