Author Topic: Proof that your savings rate is more powerful than earning more  (Read 7700 times)

Southern Stashian

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Over the past few years we have enjoyed the advise that MMM has dished out, which has changed our thought process immensely. While our co-workers have joined the "I don't make enough money ...." bandwagon of complainypants people over the years, long ago we jumped off that train and started down a new path of optimizing our spending and savings rates.

Although not as extreme as MMM himself or some others here, we do a pretty good job limiting our spending. Despite some anti-mustachian vices like day trips, Disney, wine and having a new vehicle, our 180 degree turnaround has been somewhat unnoticed as its now pretty much on auto pilot. We never really thought about it until our recent purchase of a new build townhouse.

Going through the loan process we noticed that we had pretty much no debt on our loan documents, which was surprising to the mortgage broker. When asked for our asset paperwork and closing costs (@ $30K), we had no problem coming up with them. Our co-workers and family now think that we have recently hit the lottery, when all that we did was change our relationship with our money.

When visiting our bank, the teller tries to get us to open up credit cards and money market accounts at, get this, 0.005% interest due to our new savings account balance. We thank her for the offer and politely decline every time. These types of things are now a weekly occurrence and it wasn't from earning a ton of additional income. We simply increased our savings rate by using our money more efficiently.

We have a decent combined income of @ $115K and feel pretty good about our current setup moving forward. Due to our new savings rate and having all of our accounts on auto pilot, both of us can max out our 401K's and IRA's every year. Combine that with our employers retirement contributions and we invest nearly $60K per year without even really thinking about it. Its quite the change from where we were five years ago with a few hundred in savings and minimal retirement accounts.

Well, thats our story. I will forever believe that watching where your money goes is much more powerful than waiting for a larger paycheck. If you are able to do both though, then my hats off to you!
« Last Edit: June 16, 2014, 04:13:59 PM by Southern Stashian »

ADK_Junkie

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Re: Proof that your savings rate is more powerful than earning more
« Reply #1 on: June 16, 2014, 12:06:41 PM »
That is awesome!  Congrats!

I am still figuring out how to pull my wife into the MMM universe...

payitoff

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Re: Proof that your savings rate is more powerful than earning more
« Reply #2 on: June 16, 2014, 12:08:18 PM »
Great job!  So you both have IRA's as well, do you still get the tax deduction having it with your combined income? i heard that when you have a 401K your IRA might not be deductible up to a certain income limit?

http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

We have about the same income and i didn't open an IRA account coz of this, my husband didnt have 401K at work, so we only have one IRA account.

I look forward to be in the same position with you guys someday.

Southern Stashian

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Re: Proof that your savings rate is more powerful than earning more
« Reply #3 on: June 16, 2014, 12:38:29 PM »
Great job!  So you both have IRA's as well, do you still get the tax deduction having it with your combined income? i heard that when you have a 401K your IRA might not be deductible up to a certain income limit?

http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

We have about the same income and i didn't open an IRA account coz of this, my husband didnt have 401K at work, so we only have one IRA account.

I look forward to be in the same position with you guys someday.

I want to say that an AGI between $96k and $116k is where the tax savings phase out on a couple filing jointly that has retirement plans at work AND contributes to an IRA. To be honest though we have never had to worry about our AGI as we contribute to a FSA, HSA and to our 401K's with pre-tax contributions.

Combine that with other deductions like being a homeowner and having a large childcare bill (ending this year - yippy!) and it looks like we earn a lot less on paper than we actually do.

Due to our childcare bill going away in 2014, we may end up consulting a tax and financial advisor this year to make sure we haven't missed anything. I have been stubborn to ask for professional help as there are so many resources on the internet for free. I've done pretty well managing our retirement investments without any help (averaging 11% - 18%), so I've been reluctant to get the help that we will probably need going forward. Lol.
« Last Edit: June 16, 2014, 12:44:51 PM by Southern Stashian »

FIreDrill

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Re: Proof that your savings rate is more powerful than earning more
« Reply #4 on: June 16, 2014, 12:44:29 PM »
Great job!  So you both have IRA's as well, do you still get the tax deduction having it with your combined income? i heard that when you have a 401K your IRA might not be deductible up to a certain income limit?

http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

We have about the same income and i didn't open an IRA account coz of this, my husband didnt have 401K at work, so we only have one IRA account.

I look forward to be in the same position with you guys someday.

I want to say that an AGI between $96k and $116k is where the tax savings phase out on a couple filing jointly that has a retirement plan AND contributes to an IRA. To be honest we have never had to worry about our AGI as we contribute to a FSA, HSA and to our 401K's with pre-tax contributions. Combine that with other deductions like being a homeowner and having a large childcare bill (ending this year - yippy!) and it looks like we earn a lot less on paper than we actually do. Lol.

I believe the phase out is actually based on your MAGI which is gross pay before all the awesome pre-tax accounts us Mustachians take advantage of.  We are starting to get to the phase out point and are looking at doing ROTH's instead of T-IRA's because we will start loosing the tax advantage of T-IRA's.

Southern Stashian

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Re: Proof that your savings rate is more powerful than earning more
« Reply #5 on: June 16, 2014, 01:08:32 PM »
I believe the phase out is actually based on your MAGI which is gross pay before all the awesome pre-tax accounts us Mustachians take advantage of.  We are starting to get to the phase out point and are looking at doing ROTH's instead of T-IRA's because we will start loosing the tax advantage of T-IRA's.

I believe you're right with the MAGI and we should be looking at some different options too. Since our income has been increasing by @ 4 - 7% per year and our spending heading in the opposite direction, I'm seriously starting to re-think my "need no help" mindset.

After its all said and done though, worrying about your income and potential tax savings versus paying late payments and overdraft fees is a good position to be in. People around me just cant get their heads around that and think that changing their habits would cause them undue stress.

It really is the opposite if you ask me.

FIreDrill

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Re: Proof that your savings rate is more powerful than earning more
« Reply #6 on: June 16, 2014, 01:22:48 PM »
I believe the phase out is actually based on your MAGI which is gross pay before all the awesome pre-tax accounts us Mustachians take advantage of.  We are starting to get to the phase out point and are looking at doing ROTH's instead of T-IRA's because we will start loosing the tax advantage of T-IRA's.

I believe you're right with the MAGI and we should be looking at some different options too. Since our income has been increasing by @ 4 - 7% per year and our spending heading in the opposite direction, I'm seriously starting to re-think my "need no help" mindset.

After its all said and done though, worrying about your income and potential tax savings versus paying late payments and overdraft fees is a good position to be in. People around me just cant get their heads around that and think that changing their habits would cause them undue stress.

It really is the opposite if you ask me.

Totally agree! It's amazing how much stress has gone away since we started staching away around 50% of our income.  Knowing that we could go through a job loss and be totally fine is an awesome feeling.  In the mean time we will continue to keep staching, although I need to figure out how to go on "auto-pilot" and not worry about how much we are putting away.  Oh, and awesome job on everything you have accomplished in the last couple years!

FIreDrill

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Re: Proof that your savings rate is more powerful than earning more
« Reply #7 on: June 16, 2014, 01:44:45 PM »
Looked up some more information on MAGI and from what I can tell only certain allowed deductions are added back to calculate your MAGI.  It looks like MAGI does not add back in pre-tax 401k contribution, HSA contributions, or FSA contributions.  I'm going to look into it more but this would be awesome cause then you could gross way more then 116k and still take full advantage of T-IRA's.


Source: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG-Exhibit-2-2-Modified-Adjusted-Gross-Income-Computation

Numbers Man

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Re: Proof that your savings rate is more powerful than earning more
« Reply #8 on: June 16, 2014, 01:54:44 PM »
Great savings job!

Southern Stashian

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Re: Proof that your savings rate is more powerful than earning more
« Reply #9 on: June 16, 2014, 05:39:36 PM »
In the mean time we will continue to keep staching, although I need to figure out how to go on "auto-pilot" and not worry about how much we are putting away.  Oh, and awesome job on everything you have accomplished in the last couple years!

Thank you everyone! :)

The way that it happened for us was with small changes. Our cash outflow was greatly reduced with a lot of little changes like the $10 iPhone plans, eating out once a month, limiting credit card usage to only core expenses (gas, food, utilities) and the like. Its remarkable to see the stash piling up when you put these little changes into effect, all the while not noticing a huge change of lifestyle.

Once our stash started growing, we set up automatic payroll deductions that met our employers maximum match into our 401K's. Over time we noticed that we were still able to meet our monthly commitments and save a significant amount of our income, so we kept adding more and more to our payroll deductions with every pay raise and cut in spending.

Over time our yearly 401K contributions were maxed out ($17,500 x 2). We also had enough of a stash left over at the end of the year to contribute towards our IRA's. It all happened with a modest amount of effort, and is pretty much how MMM explains it in his "What it feels like to become rich" posting (http://www.mrmoneymustache.com/2012/08/16/what-it-feels-like-to-become-rich/).

Although not yet rich (in monetary terms), it does seem a little boring sometimes now that our plan is in full swing. We keep watching the stash grow and grow while going about our everyday lives. Its pretty cool to be so stress free when it comes to money while those around us are not. I guess thats why everyone thinks that we have hit a jackpot or something. Lol.
« Last Edit: June 16, 2014, 05:46:52 PM by Southern Stashian »

Nords

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Re: Proof that your savings rate is more powerful than earning more
« Reply #10 on: June 16, 2014, 08:39:12 PM »
Going through the loan process we noticed that we had pretty much no debt on our loan documents, which was surprising to the mortgage broker. When asked for our asset paperwork and closing costs (@ $30K), we had no problem coming up with them.
Several years ago when we refinanced with a small local bank, their application included a blank page.  I asked the mortgage agent what it was for, and she said "Oh, that's a continuation page to list your debts.  You don't need it?!?"

Southern Stashian

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Re: Proof that your savings rate is more powerful than earning more
« Reply #11 on: June 16, 2014, 09:32:32 PM »
Going through the loan process we noticed that we had pretty much no debt on our loan documents, which was surprising to the mortgage broker. When asked for our asset paperwork and closing costs (@ $30K), we had no problem coming up with them.
Several years ago when we refinanced with a small local bank, their application included a blank page.  I asked the mortgage agent what it was for, and she said "Oh, that's a continuation page to list your debts.  You don't need it?!?"

Hahaha Nords. We had the same pages!

We only had two items listed on page #1 (our small remaining mortgage on an investment property and our two $0 balance reward credit cards.) Seeing that was like a breath of fresh air.

Our mortgage broker said sometimes people need three sheets or more (30+ debts and applying for a mortgage? Really?)

The strange part was not being in shock by hearing that as many, many people are in denial about their finances.
« Last Edit: June 16, 2014, 09:37:03 PM by Southern Stashian »

George_PA

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Re: Proof that your savings rate is more powerful than earning more
« Reply #12 on: June 16, 2014, 10:37:07 PM »
Going through the loan process we noticed that we had pretty much no debt on our loan documents, which was surprising to the mortgage broker

We went through the same thing in late 2011 early 2012.  It turns out that despite all the hype about CCs and your "credit score", you can get a mortgage by showing proof that you paid utilities (I think it was about 5) and rent on time for the last few years.  You don't have to take out previous debt to get a mortgage.   

That's what we did, when we got our mortgage we had no outstanding debt or CCs.  Of course a couple years later we ended paying off the whole mortgage anyway because of our high savings rate.  So if you get strange reactions now from the general non-mustachian population now wait until you tell them that you are debt free and have a paid off house with no mortgage.

Jamesqf

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Re: Proof that your savings rate is more powerful than earning more
« Reply #13 on: June 16, 2014, 11:23:29 PM »
We have a decent combined income of @ $115K...

I have to disagree with the thread title: earning more is more powerful than your savings rate.  You just didn't notice this because you were already earning more* before you started saving, so you had lots of room to save.  Would have been a far different story if your combined incomes were $15K.

That is, far more than a basic subsistence-level income.

Southern Stashian

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Re: Proof that your savings rate is more powerful than earning more
« Reply #14 on: June 17, 2014, 05:34:22 AM »
We have a decent combined income of @ $115K...

I have to disagree with the thread title: earning more is more powerful than your savings rate.  You just didn't notice this because you were already earning more* before you started saving, so you had lots of room to save.  Would have been a far different story if your combined incomes were $15K.

That is, far more than a basic subsistence-level income.

Your point is well taken and yes, if your making $15K than obviously you couldn't save much, and in that extreme situation then yes, you need to up your income. The point of our story though is that until discovering MMM, our income, although still above average at the time was largely taken up by debt for our family of five - two car payments, two mortgages, high utilities, large cell phone payments and a $1600 per month childcare payment (yikes!). Lol.

Now we could have moaned and groaned about our situation, waiting for a bigger paycheck but we took action to chop down the above numbers and save more. Sure, our income now is why we can squirrel away so much, but it took cutting our spending to get there and not our modest pay raises along the way.

Anyone with an average income and debts could do the same as us, although maybe not as extreme in the stashing away cash part. I'll always believe that you'll get further ahead by cutting your spending vs waiting for pay raises. If you can do both than great, you'll be able to get ahead even faster!
« Last Edit: June 17, 2014, 05:46:33 AM by Southern Stashian »

soccerluvof4

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Re: Proof that your savings rate is more powerful than earning more
« Reply #15 on: June 17, 2014, 06:27:37 AM »
I got your point and have followed a lot of the same disciplines! Well done!

sobezen

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Re: Proof that your savings rate is more powerful than earning more
« Reply #16 on: June 17, 2014, 08:34:55 PM »
Great job stashing away more and more!  I definitely concur generally staching is extremely helpful compared to working and hoping on uncontrollable raises.  Also agree if you can get raises and increase how much you stash it is a double winning combination that will turbo charge your retirement goals.  Keep on sharing, looking forward to future updates.  Cheers!

Bateaux

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Re: Proof that your savings rate is more powerful than earning more
« Reply #17 on: June 17, 2014, 11:46:32 PM »
My income or interest from my investments have surpassed my savings rate and will soon surpass my income from my job.  After applying common sense money handling for twenty years things start to get silly.  If I were to keep on this path for 10 years and actually retire at the minimum age of 55 required by my company it would get even sillier. I actually enjoy the frugal lifestyle.   I've moved my retirement date from 2023 to 2020 to 2018.  I could FIRE right now if I were prepared mentally.  The money is in place and will continue to work for me.  It's almost easier just going to work versus figuring out what I really want to do.

Jamesqf

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Re: Proof that your savings rate is more powerful than earning more
« Reply #18 on: June 17, 2014, 11:48:55 PM »
Anyone with an average income and debts could do the same as us, although maybe not as extreme in the stashing away cash part. I'll always believe that you'll get further ahead by cutting your spending vs waiting for pay raises. If you can do both than great, you'll be able to get ahead even faster!

Sure, it all depends on where you start from.  If you already have a decent middle-class income, you can do a lot with saving and/or cutting out wasteful spending.  If your income is on the low side, though, you might do better to think about ways to significantly increase your income - as I did when I went from farm labor to construction to programming computers.  I agree that waiting on simple pay raises isn't a good tactic: you usually need some sort of career change to get a real income boost.

Schaefer Light

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Re: Proof that your savings rate is more powerful than earning more
« Reply #19 on: June 18, 2014, 10:49:49 AM »
From a tax perspective, saving is definitely the way to go.  Every extra dollar you earn is taxed such that you're typically getting no more than 65 - 85 cents (depending on your tax bracket and where you live).  When you save a dollar, you get the full benefit of that dollar.