Savings Rate vs Absolute Costs

[Tyson]

I've noticed on a few threads that for high earners, it's relatively easy to get savings rates above 50% and often times closer to 70%, which is very good.  But these people often have living costs between $70k and $100k per year, which way above the $25k per year that many/most people here shoot for, so even with a 70% savings rate, theres a bit of tension.

So, should we do away with savings rate entirely and just tell people to shoot for $25k per year regardless of income?  Or is the savings rate still the best guide, even for high earners?

[zephyr911]

I think the guy who started this whole thing is looking to maximize his appeal by not being too prescriptive. That said, most adherents would say living on 70-100K is exploding-volcano-of-waste territory regardless of how much money you make. I would say it's hard to design a mindful and intentional lifestyle that consistently consumes that level of resources, though theoretically possible. Depends on what the expenses are for.

[Tyson]

I think the guy who started this whole thing is looking to maximize his appeal by not being too prescriptive. That said, most adherents would say living on 70-100K is exploding-volcano-of-waste territory regardless of how much money you make. I would say it's hard to design a mindful and intentional lifestyle that consistently consumes that level of resources, though theoretically possible. Depends on what the expenses are for.

Oh, sorry about that!  My situation is that I make $120k per year but since finding MMM am trying to get my yearly expenditures down to $25k or so, which makes sense to me and seems doable.  But there seems to be some tension on the forums around people that make more (sometimes much more) than that and how/why they should be frugal. 

I see the tension as coming from 2 things - 1, for FIRE your savings rate really is the most potent indicator of progress, while on the other hand, a lifestyle above a certain point is seen as wasteful regardless of income or savings rate.  I'm just curious at what point is a life wasteful and at what point is it considered not wasteful. 

[Jags4186]

I've noticed on a few threads that for high earners, it's relatively easy to get savings rates above 50% and often times closer to 70%, which is very good.  But these people often have living costs between $70k and $100k per year, which way above the $25k per year that many/most people here shoot for, so even with a 70% savings rate, theres a bit of tension.

So, should we do away with savings rate entirely and just tell people to shoot for $25k per year regardless of income?  Or is the savings rate still the best guide, even for high earners?

Savings rate is a guide towards becoming FI.  Although the more I look at it savings rate is NOT as easy as "the simple math of early retirement" suggests. 

Say you start making 50k/yr and 15 years from now you're making $150k/yr savings 50% all the way up.  Your 25k in savings year one now has to support a spending level of 75k in year 15, not a spending level of 25k.  Doesn't work.

I don't see a reason to harp on the 25k number (which, btw, isn't really 25k.  It's 25k + opportunity cost of having a paid for house + your property taxes if you live in an area where your property taxes are more than MMMs 1200/yr or whatever they are).

Focus on conscious spending, try to reduce waste, and save as much as possible using 50% as a target.  Anyone who makes less than 100k/yr who's saving 50% is living a pretty frugal lifestyle compared to the normal person.

[zephyr911]

I think the guy who started this whole thing is looking to maximize his appeal by not being too prescriptive. That said, most adherents would say living on 70-100K is exploding-volcano-of-waste territory regardless of how much money you make. I would say it's hard to design a mindful and intentional lifestyle that consistently consumes that level of resources, though theoretically possible. Depends on what the expenses are for.

Oh, sorry about that!  My situation is that I make $120k per year but since finding MMM am trying to get my yearly expenditures down to $25k or so.

Sorry for what?

FWIW, my situation is very similar. Total (FT+PT+rents) is about $120k, used to spend more or less the entirety, cut spending below $3k/mo with a goal of <$2K.

There are various reasons for doing that... in my case, I don't think it's wrong to spend more, but I have to get there temporarily to ensure I can quit FT work and be able to pay my bills with only my existing PT jobs. Once I have that free time I expect income to rise again but my highly risk-averse nature demands baseline costs below baseline income before I make the leap, regardless of savings. I've been broke more than once, and I don't ever want to go backwards again.

I don't see a reason to harp on the 25k number (which, btw, isn't really 25k.  It's 25k + opportunity cost of having a paid for house + your property taxes if you live in an area where your property taxes are more than MMMs 1200/yr or whatever they are).

Yeah, I've seen people do the math on that and it worked out to more like a $40K equivalent via the paid-for house, etc.
edit:But it's still a good baseline figure if you plan on using the same strategy. It does represent actual spending, after all.

[Davids]

Savings Rate is a guide towards FI. Obviously the expense totals are different though if one person maintains a 70% savings rate on a $50K salary vs. a 70% savings rate on a $200K salary but both will lead to FI at the same time, just different lifestyle choices.

[couponvan]

The higher the income the larger the percentage that goes to taxes. After a certain point upwards of 1/2 of the income goes to taxes.

[NorCal]

This describes my family pretty well.  In the end, this is a group where the standard rules of thumb need a bit of adjustment.  It truly boils down to individual situations.  We have very high incomes and manage a 60-70% savings rate, depending on bonuses.

This also comes with living in a HCOL area, with a kid.  We spend $23K/year on daycare alone.  We also spend $34K/year to rent an 1,100sqft house.  The 20% down-payment we've now saved for a house around here could be used to buy a home outright in a LCOL area. 

In a scenario where we're retiring to a LCOL area, we could instantly cut around $60K of spending.

[Retired To Win]

...since finding MMM I am trying to get my yearly expenditures down to $25k or so, which makes sense to me and seems doable.  But there seems to be some tension on the forums around people that make more (sometimes much more) than that and how/why they should be frugal. 

I see the tension as coming from 2 things - 1, for FIRE your savings rate really is the most potent indicator of progress, while on the other hand, a lifestyle above a certain point is seen as wasteful regardless of income or savings rate. I'm just curious at what point is a life wasteful and at what point is it considered not wasteful.

Goodness, there's no right answer to that question (bolded above).  It's a personal call totally dependent (or should be) on your values.  This is not the Mustachian ARMY, you know.

[soupcxan]

This describes my family pretty well.  In the end, this is a group where the standard rules of thumb need a bit of adjustment.  It truly boils down to individual situations.  We have very high incomes and manage a 60-70% savings rate, depending on bonuses.

This also comes with living in a HCOL area, with a kid.  We spend $23K/year on daycare alone.  We also spend $34K/year to rent an 1,100sqft house.  The 20% down-payment we've now saved for a house around here could be used to buy a home outright in a LCOL area. 

In a scenario where we're retiring to a LCOL area, we could instantly cut around $60K of spending.

I get tired of people harping on "everyone should be able to live on $25k/yr." Daycare alone next year will be $16k. Our housing expense, mortgage/tax/insurance excluding maintenance, will be $24k. Our health insurance (just our share, not counting what our employer pays) will be $3k. Gasoline for two cars is $2k and because of where our jobs are there is not an option to move to a cheaper location without one of us giving up a lot of pay. And we do not even live in a particularly HCOL city.

Living on $25k is perfectly reasonable for a young, single guy in his 20s. For a married family of three with two jobs, not so much.

[Bearded Man]

Before I met my gf, I was living off 12K a year in a paid off house. This is in the greater Seattle area. If I moved back into said house (currently a rental) and my gf lived with me, or a gf lived with me, my living expenses would be 6K a year. This is within an hours commute by bus, train, or car to Seattle, or minutes to any other city with jobs in the area, and I'm in the six figure range. This is a pretty awesome situation if I do say so myself, as I have a low cost of living while being in a high income area, and owning three properties who's values are rising dramatically.

[use2betrix]

Sorry for the n00b question, but is savings rate based off gross or net income?

[iamlindoro]

Sorry for the n00b question, but is savings rate based off gross or net income?

Generally speaking, net.  It's a bit of a gray area since some part of your savings can be pre-tax, but generally speaking that's how it's done.

[horsepoor]

This describes my family pretty well.  In the end, this is a group where the standard rules of thumb need a bit of adjustment.  It truly boils down to individual situations.  We have very high incomes and manage a 60-70% savings rate, depending on bonuses.

This also comes with living in a HCOL area, with a kid.  We spend $23K/year on daycare alone.  We also spend $34K/year to rent an 1,100sqft house.  The 20% down-payment we've now saved for a house around here could be used to buy a home outright in a LCOL area. 

In a scenario where we're retiring to a LCOL area, we could instantly cut around $60K of spending.

I get tired of people harping on "everyone should be able to live on $25k/yr." Daycare alone next year will be $16k. Our housing expense, mortgage/tax/insurance excluding maintenance, will be $24k. Our health insurance (just our share, not counting what our employer pays) will be $3k. Gasoline for two cars is $2k and because of where our jobs are there is not an option to move to a cheaper location without one of us giving up a lot of pay. And we do not even live in a particularly HCOL city.

Living on $25k is perfectly reasonable for a young, single guy in his 20s. For a married family of three with two jobs, not so much.

So to look at it another way, if MMM spends $25K, that does not include childcare because he and his wife are FIRE.  His house is paid off so he is only paying tax, and I suppose insurance.  So right off the bat, mortgage and childcare add $35-40K to MMM's $25K due to different circumstances, holding all other expenditures equal. 

There is nothing magical about $25K.

There are two separate ideas being intertwined here.  As others have pointed out, savings rate is correlated to your ability to FIRE, so if you're here to hit FIRE as soon as possible, maximizing SR should be your priority.

However, MMM is also against wasteful spending that makes us weak and destroys the planet, so from that perspective, we should all dial it back to have a lighter footprint and be more badass whether we earn $10K or $1M.

[use2betrix]

^ one does not have to be FIRE to have a paid off house or to not have childcare.

Different peoples results may vary, and that's why it would obviously be stupid for every single person on this forum to have the exact same goals and guidelines. For example, why do you think people put hcol or lcol? Because it obviously makes a difference. Same with when they put dink.

[boarder42]

I think the guy who started this whole thing is looking to maximize his appeal by not being too prescriptive. That said, most adherents would say living on 70-100K is exploding-volcano-of-waste territory regardless of how much money you make. I would say it's hard to design a mindful and intentional lifestyle that consistently consumes that level of resources, though theoretically possible. Depends on what the expenses are for.

Oh, sorry about that!  My situation is that I make $120k per year but since finding MMM am trying to get my yearly expenditures down to $25k or so, which makes sense to me and seems doable.  But there seems to be some tension on the forums around people that make more (sometimes much more) than that and how/why they should be frugal. 

I see the tension as coming from 2 things - 1, for FIRE your savings rate really is the most potent indicator of progress, while on the other hand, a lifestyle above a certain point is seen as wasteful regardless of income or savings rate.  I'm just curious at what point is a life wasteful and at what point is it considered not wasteful.

you say you trying to get YOUR expenses down to 25k ... is that just you or do you have a family.  if you are just you then you're really looking at a 50k FIRE... and if you dont have a paid off house ... as many of us dont that lifts you up closer to the 70k level ... not having a paid off house is a safer FIRE than having one at today's current interest rates. 


Big picture at the core MMM is about living a meaningful life on very low costs and finding happiness in all those small things.  BUT everyone is different.  each person can take and bend this to meet what they deam as the quality of life they want to live.  could i retire in less than 5 years if my goal was 25k yeah.  but if i work 5 more to the ripe old age of 37 i can live litterally like a king.  yeah its not pure root cause mustachian but it applies the same principals.  and we cut costs where they need to be cut so we can spend where we like to spend. 

you work this to find your own balance ... MMM found ERE and he doesnt live that lifestyle.  and to that point MMM writes off all these financial seminars as business expenses and doesnt include it in his finances.  he travels all over like equador and california etc. in the name of his blog.   so you could say he's actually living on more and enjoying life more than that number you see him post each year. 

[horsepoor]

^ one does not have to be FIRE to have a paid off house or to not have childcare.

Different peoples results may vary, and that's why it would obviously be stupid for every single person on this forum to have the exact same goals and guidelines. For example, why do you think people put hcol or lcol? Because it obviously makes a difference. Same with when they put dink.

Well ostensibly the OP would be able to zero out childcare costs if he/she were FIREd. 

My post did not imply that being mortgage free and FIREd were linked in anyway, just that MMM's budget doesn't include paying a mortgage.  Clearly you can be working and have a paid off house, or be retired and have a mortgage. 

[wenchsenior]

I find 25-30K/year/PER PERSON to be a reasonable guide to relative frugality for us, and I try to keep our expenditures around that level. It has worked for us, supporting 2 entirely separate households consisting of 2 people in one house and 1 person in the other.

Our total expenditures work out to 80-85k/year spread across the two households. This is a low-cost-of-living area, but on the other hand, we travel regularly because it is also a depressing pit in terms of quality of life. I am currently aiming to get a bit more frugal...sticking to the 25K/person marker (and appreciate hints on this page that help me do that), but I don't have any interest in cutting our spending any lower, because it would definitely eat into our standard of living.

ETA: forgot to say, we usually save between 40-55% of net income, depending on the year.

[Albert]

I find 25-30K/year/PER PERSON to be a reasonable guide to relative frugality for us, and I try to keep our expenditures around that level. It has worked for us, supporting 2 entirely separate households consisting of 2 people in one house and 1 person in the other.

That's the key message - "for us". We on this board are living in wildly difference cost of living circumstances. For me 25k in dollars is an impossible number because the rent for my modest one bedroom apartment + health insurance alone is about 23k/year.

[mr_orange]

Our spending is very large by MMM standards.  I ran a detailed budget about 2-3 months ago and fully 71% of our expenses were for:

1.  Federal taxes - By far our largest expense
2.  Childcare - Bigger than our mortgage (at the time....has since gone down when our oldest daughter went to public school full time)
3.  Mortgage - PITI
4.  Food
5.  FICA taxes

That leaves 29% for everything else.  For us that is about $2600/month for a family of 5.  Of the 4 categories above only item 4 is something we can really optimize without trading off disproportionately more in income or opportunity cost.  Item 1 is large and will be so while we're working hard to earn income.  To eliminate item 2 we'd need to stop working and I think it would be sub-optimal educationally for our kids.  Eliminating item 3 would necessitate we stop investing the money in more lucrative investments.  Item 5 will be present while we're working. 

That leaves item 4, which admittedly is too high.  I have been working on reducing it. 

I agree with the posters above that the spending level depends on your personal circumstances and values.  If you eliminate items 1, 2, 3 (the PI portion), and 5 above and track item 4 along with our other 29% + TI from mortgage we're spending roughly $50k/year.   Could we reduce this?  Sure.  Do I think we'd be happier if we did?  Probably not.  To me it is far more efficient to focus on making the extra $50k - $25k == $25k than it is to apply all focus to reducing expenses the same $25k.  That's $625k, or probably 15-20 development projects in our business and/or an additional 3 years of working a job situation we don't hate. 

[Albert]

Taxes quite obviously don't count as spending otherwise no one with a six figure income can ever be frugal.