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A second interview, where we dive into some other topics, is available here as Podcast Episode 96.
Jesse: Okay, I’m here with Mr. Money Mustache, from MrMoneyMustache.com and today we’re going to focus mainly on the savings rate, and I want to have everyone approach this with an open mind, so open your minds, and then let’s dive in.
*Full transcript available for download at the end of the post.
Welcome to the podcast,
Mr. Money Mustache: Thanks a lot Jesse, it is a pleasure to be here.
J: So you and I just finished up a business trip down in Ecuador.
M: Yes it was very serious, very business like.
J: Very business like. Powerpoints were flying. There was lots of downtime and conversation and we got to know each other pretty well. I wanted to basically have you come on and introduce you to YNABers who don’t already know about you, which there are probably a good bit. For those that are fans of both of us, then you know, double bonus.
I want to talk about the savings rate today, and I guess first, let me have you give a little bit of background on who you are, and why you’re an authority–the authority–we talked about how absolute truth flows from your website. So, why you’re THE authority on all things you decide to write about, and then I’ll start asking you questions–I might even play devil’s advocate.
M: Sounds like trouble. Okay well, the story is that I came to this United States country from another one, one called Canada, and I just found, without studying up on the cultural norms here, I found that by earning a reasonable professional salary and spending a reasonable amount of money, you end up saving a reasonable of money so I had enough to retire just before turning 31–my wife and I did. So I quit working in 2005 in order to start a family, and here we are eight years later.
A couple of years ago I found that none of the other coworkers in this industry–engineering–did the same thing. They’re all living paycheck to paycheck. I became exasperated with their financial behavior, and started this blog explaining how you can actually not spend all the money you earn, and how it builds up and gives you financial freedom sooner than you realize.
J: Much, much sooner than what is the norm out there. So you retired at almost 31, and you and your wife were both working, I guess, and you were an engineer, correct?
M: Correct, we both worked in a high-tech industry, sort of engineering things. She was a project manager for a while, and while we had higher than average salaries, they weren’t like wall street or lawyer salaries. So it’s entirely within the possiblity of a lot of the type of people I see YNAB customers as…most white collar…well the biggest thing is just understanding savings rate, and understanding happiness, and how often is that really connected to spending–less than we think.
J: Yeah, they’re not really connected much at all.
J: That is a good point. I guess that’s one way to approach it is from the angle of what makes people truly happy, but we’ll do a little bit–we might get into that, but that’s a fairly deep topic–but we’ll definitely talk about maybe some ways that you question the cultural norms that you didn’t study up on, and maybe how people could do that as well.
You’re well known for a post, I can’t remember the exact name…
M: Yeah, the Shockingly Simple Math Behind Early Retirement.
J: Give me, walk me through a hypothetical scenario…someone saves x%, what their retirement horizon looks like.
M: That post was all about how retirement saving is simpler than they think. Everyone thinks in terms of million dollars needed, or how many hundreds of years do I have to work to retire. Really if you do the math it kind of cancels itself out and you end up with some neat stuff.
So if you’re saving 10% of your income, and investing to get stock market returns, it’ll take about 51 years of saving that much, until you have a big enough stash of investments that you can live off, replace that 90% of your take-home pay that you were spending. But then as you slide up the savings rate, that makes a huge difference, so just going from 10 to 15 percent you’re down to working only 43 years, so you just cut eight years off your mandatory working career just by going from 10 to 15 percent.
Here’s where things get crazy. I talk about people saving 50% of their take-home pay, which sounds crazy but it’s not difficult at all once you get into practice, so if you do that, it’s a 17-year working career. If you start at 20, you’re retired at 37. It can go even further. A lot of people who read my blog, have more like 65 to 75% savings rates and that actually. That translates into about a 7-year working career. Mine was somewhere in between, where I worked about nine years before I had enough to retire.
J: You mentioned in that same post that it’s a two-edged sword, a double-win, if you lower what it takes to live happily, then you lower the amount you need to save in perpetuity.
M: Yeah, that’s right. So imagine somebody who’s gotten used to a lifestyle that costs them maybe $65,000 per year, which is maybe what a 2-income family would be living on nowadays, with pretty good jobs. And they’re locked into that, because they can’t imagine spending any less, which means they’ll need $65,000 per year, with inflation, which takes well lover a million dollars, a lot of money, to have that type of passive income.
On the other hand, it’s possible to live on a lot less. My family, with the exception–the only cheating we do is that we have a paid off house and the property taxes are fairly reasonable, but anyway on top of that it only costs us about $25-30,000 to live, so you can retire with much less than a million dollars, or even less if you’re a landlord or rental house guru, so you can income out of even less savings with that.
J: Building up a little stream of income, if you were to build up, just to give people some math, if you were to build up a stream of income that paid you $1,000 per month, that’s $12,000 per year, and ignoring taxes for a little bit, then you’d say, to nest egg that amount you’d need $12,000 times 25.
M: We didn’t mention that in this interview so far, but to figure out how much money you need to save thinking about dollars, take annual spending and multiply it by about 25, and that’s about how much you need saved. So if you have $10,000 of spending, you’d need $250,000 saved to live on that the rest of your life. You may make an adjustment if we were to go through some giant economic depression or something comes along.
It’s called the 4% rule, and you can basically think of it as 25x your spending.
J: So if you LOWER your spending by $1,000 per month, it’s the same as finding an income stream of $1,000. They work the same way–well no they don’t. The nice thing about cutting your spending is that you’re not taxed on that $1,000 that it took to earn. Although if we’re talking about spending levels, and income levels where you’re at, then taxes become almost a non issue.
M: You’re totally right. I made another post about this called The Lovely Low Taxes of Early Retirement and while the typical golf-at-the-hilton [person] needs to plan for a $250,000 a year retirement, which means a lot of that money is going to taxes out of your retirement income, in my case, living as a family with a young child, on $30,000 or less there’s pretty much no income tax due on that, because the government takes pity on you and says “Oh! It must be so hard living on only that amount! We’re going to put you in the lowest bracket and give you credits and stuff like that!” So if you’re really only drawing that amount, you’re pretty much immune from taxes in the US anyway.
Now I’ve been having a higher income so we’re still paying lots of taxes, but it’s sort of like an unexpected thing that happened in retirement, and it doens’t matter because our needs are still the same, because we only need that 25-30,000 so if that income ever went away then the taxes would go away too.
J: The income’s kind of gravy, the taxes you shrug your shoulders at, because it doesn’t approach your needs at all.
Now, you have thousands and thousands of people right now, that heard you say well, we live on $30,000 or something…
M: Yeah it’s 25-30 depending on the year. Last year it was in the 25 range, but we’re trying to spend more.
J: Trying, as hard as you can.
M: It’s hard to do, but once your needs and your wants kind of fade away, then you feel that you’re living this crazy expensive life, then you add up the bills at the end of the year and it’s still 25,000. It’s kind of a nice problem.
J: Yeah, that is. So tell me, let’s do a little bit of lifestyle analysis. I’m sitting here questining even the remotest possibility on living on such a–I would adjust mine up because I have more kids–but I would still say No, that’s too low. I can’t do that. So a big area for people is housing, tell me how you would approach that from a Mustachian point of view.
M: Well, I’m not the most mustachian person when it comes to housing because I have a fairly big house right now. But property tax is a big thing, so a lot of people live in NJ or CN, so your property taxes are $10-20k a year, you’re never going to have a $25,000 annual expense with that. So you have to question where you live, or you just have to save more, if you live in this high-home priced areas. Or you could be a renter.
But one of the biggest things you could do with any house is to figure out your energy consumption and make it lower. For example, our natural gas bill is less than $40/month year round. A lot of people spend a lot more. Our electricity is about $20. Just standard stuff, like what kind of lightbulbs you use, how much air conditioning you use, considering line-drying your clothes if you live in a dry climate like you and I do. It’s really, actually huge changes–thousands of dollars per year and people just aren’t thinking about them.
So you look at each of your expenses separately, don’t think “25% I can’t get there!” You think about each of these things, sliced down individually instead of the total, and it ends up being small.
J: I’m working on an epic cell phone post and that’s one thing, my business pays for the cellphone and so I suffer from this small business owner mentality where the expense, if it’s through the business is somehow not as important.
M: I do the same thing.
J: A lot of people do that, so it’s like play money until it actually hits your personal account. But I’ve been saying, no, even though the business pays for it, I still want to get it down. Inspired by your post about just cutting your plan, I think from my analysis, and I maybe wasn’t as aggressive as you in your post, I can’t remember the details, but I’m jumping from $170 a month for me and my wife, with fancy iphones, down to $20 per month, if I’m okay with only making calls in a wifi area, or grabbing an emergency phone out of the glovebox of my car. So, people will always say, “What if you’re stranded on the side of the road?” As if we weren’t for the prior 50 years before cellphones–and nobody died.
Anyway, I was looking at that, $165 down to $20 per month, a savings of $140 a month, about, and thinking about how much I would have in my nest egg for that. 140 x 25…
M: Actually, 140 x 12 to get your annual, and then times 25. That’s a great way for the readers.
J: 42 grand. That’s what I got.
M: I got the same thing.
J: So you’re thinking about saving that much money for somebody…that would take a long time.
M: So there you go, you think about slicing your expenses by $140 per month, that’s $42,000 closer that you are to retirement. A lot of people spend more than that just on coffee per month. Let alone, you know, important stuff like communications. And the same thing goes with cars, people are, financial beginners are still financing cars. They might have $150 to $300 payments, and then they realize later, “Oh I don’t have to do that. I can buy a used car.” And if you choose your housing to be relatively close to work, then you never use that used car, so it may last you 15 years instead of a new car lasting you five years if you live out in the sticks. So these things can make a much bigger difference than $140.
I hear from people every day that have cut their expenses by $3,000 per month. they went from $6,000 for a family, down to $3,000, just by changing stuff like cars, cellphones, cable TV, groceries, restaurants, so $3,000 times 12 times 25.
J: This is the best math to do.
M: Yeah, so those people are $900,000 closer to retirement.
M: A million bucks richer, by just cutting this typical high-income lifestyle in half. And they’re still just as happy because they still have their friends, eating healthy food, and didn’t even have to move to a smaller house. If you do that, it’s an even bigger change.
J: Our blogger Mark, who really likes your stuff, he started walking to the office, which is I think two miles away from his house, he and I live in the same neighborhood, and he’s dropped his gas needs on a monthly basis down from, I think they were maybe $250 per month, and now they’re $100 per month. So it’s the same thing as the cellphone bill, you look at a $50,000 nest egg bonus AND he’s lost I don’t remember how many pounds, and inches he’s lost, but you know that it’s meditation for him, to and from work.
M: So now you’re talking, because this is what my blog is all about: you’re not making sacrifices; you’re making improvements in your life that happen to make you wealthier. For example, I would say, nobody should ever start their work day without getting some exercise first. You gotta do something outside, so you don’t want to just get out of your bed, into your car, have coffee then go to the office because you won’t be productive, and you’ll be getting creeky and old at the age of 30 if you maintain that kind of lifestyle. So your blogger, Mark, has made a positive change, and made a ton of money in the process. That’s kind of what I push for in all areas of life. Nobody is making their life worse to save money, you’re making it better. I never compromise on life quality.
J: And that is the ticket. You’ll have people that, you know, I’m one of them, I still will push against things I’m sure, you just have to ask yourself, what do I care about? When we were in Ecuador, when JD Roth gave his presentation about what you care about, you know if you’re financially free, what would you do? I think the next was if you had a year to live, or five years… but you didn’t know when exactly, what would you do…and then if you had a day to live. 24 hours. And it was amazing how my answers changed from being financially independent and thinking what would I do, versus having 24 hours to live…what would I do. Then it was all about my family, spending time with my kids, enjoying them, and if we could adjust our thinking more toward what we REALLY care about, at our core, all the spending just plummets.
M: It’s really nice when that happens. I’m kind of living my life, not on a 24-hour plan, but on some kind of “make the most out of every day” plan. So what I do is that I spend what I can with my son, who’s 7 1/2 years old, and I’m with that guy when he wakes up I’m making him and my wife breakfast, and then he goes to school, and then after school we’re doing things together. So if he’s not playing with his friends, which he loves to do, but when he’s with his parents then we’re with him too. We’re not just watching TV or doing work while he watches, we’re actually with him, at the park, or making stuff, or writing books together, so that stuff doesn’t really cost any money. You don’t have to take him to Cirque du Solei every night and spend $300. Kids don’t care whether you’re making legos with them, or messing up the kitchen table with paint, or going for a bike ride. So if you have a limit to the amount of wealth, a billionaire already, you just choose the cheaper stuff with your kids, which is good for them, and then surprisingly it doesn’t cost $100,000 a year per kid, to raise a child.
We actually added it up and we’re around $300 per month, for the total cost of childhood stuff if the 7 1/2 year range.
J: You said $300 a month for your son?
M: Yeah, we spend $300 a month on our son-related stuff since he was born.
J: The norm is that 100 grand or something per kid.
M: Sometimes it’s $250,000, it all depends on the income. People will sign up their kids for ballet lessons 2.5 hours away, so then they’ll drive the Chevy suburban 5 hour round trip three times a week, for ballet lessons. Things like that, “I’m doing it for my kid, because she’s the most important.” They don’t realize that you can separate importance from incredibly expensive and still win in both ways.
J: Yeah, and that is the double-win. It’s the quality going up, spending going down, and when spending goes down, there’s another layer of psychology there, that we get a bonus from, that we haven’t mentioned. When you’re living within your means, WELL within your means, you feel, I mean, there’s this stress that just melts away. So not only area you spending less and your quality life is improving from these hacks that we’re doing, and lifestyle design scenarios–moving closer to work, or walking or riding a bike to work, eating healthier, which means less eating out–all of these things that are paying us dividends in other aspects of our life, on top of THAT our stress drops. Which means we lose more weight if we’re overweight, our sleep improves, we don’t snap at our kids, we’re happier parents.
M: Yeah, you get better at your job, which means you’re more likely to be promoted, and the mental energy to try new stuff. If you’re totally stressed out, you might think you can’t give up cable TV because it’s all you’ve got, but when you have the cushion you have more energy, “Hey, I’m going to try and get ride of TV and see what happens!” Suddenly that’s another change, and you have even more mental power. “You know what? I’m going to bike to work even though it’s 8 miles each way because I’m feeling pretty strong, and am not stressed about work.” These things build on each other.
J: And then you reach the penultimate of where you have a grocery trailer.
M: Yes, that’s right. Then you stop taking your car to the grocery store.
J: I’m not there yet, I would need two trailers for our Costco runs. They’re fairly substantial. It would be a good experience.
M: There’s bigger trailers for people like you. Company called BikesAtWork, I’m getting one myself, because I use my trailer for construction materials, so anyway, you can get a trailer that’s like 8′ long. You can carry appliances on it.
J: And you’re on a bike.
M: Of course.
J: You’ve piqued my interest. Mark wrote about, inspired by you, he decided to make a Costco run on foot. It’s about 2.5 miles from our house, or three miles. It’s close, which is nice, and he did it on foot and then was carrying–(laughing)–the box on his shoulder for miles. He said it was poorly planned.
M: Yeah, I believe he complained about it. “In this case MMM, isn’t too smart.” I felt like mailing him a boxing glove with a spring in it to punlch him in the face. Dude, even I don’t carry boxes home from Costco. Put it on a dolly man. There’s a difference between being financially savvy just being…just being…dumb.
J: That was dumb, for sure. It made for a good blog post I suppose.
M: Yeah, it got a comment out of me, so that was worth it.
J: We’ve talked about a lot of different things, Mustachians don’t finance cars, they don’t buy gas guzzling cars, because why would you? It doesn’t make any sense. They don’t use their car if they don’t have to. And they kind of question the norm there. They probably don’t have cable, I’m guessing..
M: We’re too busy to be watching other people broadcast stuff. We’re busy learning and stuff.
j: Learning, creating, you don’t eat out a ton, we ate out a lot on our trip and didn’t you get kind of tired of it?
M: Well, I enjoy luxury as much as anybody else, but you know eating out all the time takes more time, and it’s nice to be able to control your own food intake, because another thing of Mustachianism is that you kind of want to eat as healthy as possible, and most restaurants aren’t going to provide that for you. You need to be able to control your vegetables. You don’t want to be eating a bunch of white flour, or the cheapest oils, whatever the chef could find on sale.
J: The benefits, financial benefits, that come from eating healthier are huge. One of the biggest costs that the US has on our health system is obesity. So it naturally follows that if people were healthier, they’d be spending less fighting that fight, the sickness that they experience a lot.
Everything’s connected, and when you make an iprovement in one area like I did, you mentioned bulbs a while ago, I didn’t really believe..I’m naïve when it comes to electricity consumption..I mean I just figured out what a killowatt hour was a year ago. I looked at my bill and thought, “oh $.11 per KWh” which I guess is a pretty good rate. I got one of those meters where I could measure the usage of different appliances and someone said..an electrician came to fix something, and he said the biggest drain is bulbs. I thought for sure he would say dryers, you know, the big clothes dryer, but he said no, bulbs. You’re using 60 watts all over your house, all the time, pumping, so you switch them out– so I did with CFLs. I couldn’t believe how much my bill dropped.
It cost me a little bit to get them all, and we had like 100 bulbs in our house, which blew my mind as well. I went and counted them all and couldn’t believe how many bulbs the house has. But, we have a large house, so I bought all of the bulbs, put them in, and my bill just plummeted. It was so simple, and very satisfying. It’s paying dividends daily for me. Which is fun.
M: Yep, that’s one of things I tell people. Especially if you have a modern house, modern houses have a lot of those recessed lights, and so the builders just put those in, in a grid, you know just all over the house so you can actually add up to a huge amount. Someone in a smaller house where you’re using lamps, then your clothes dryer or AC is the biggest draw. Either one, you just look at it and if you think about–I have a 2,600 square foot house– and my electirc bill is about $20 per month. So if you’re anywhere near 10x that, or much higher, then it’s worth looking at. It makes a big difference in your savings rate.
J: The LED bulbs are looking even cooler.
M: Yeah, I’m switching CFLs, I’m upgrading those to LEDs in the important rooms of my house, because the LED gives a much nicer kind of light, more classy like boutique look to it, and then also you’re using less power. They cost more, so you don’t put them everywhere, for now you just put them where you care about the light quality.
J: And in fiveyears, they’ll be cheap and we’ll be enjoying that luxury.
J: So you live a luxurious life, you really do.
M: Yeah, it’s hard to convince people, except for the ones that know me in person, occasionally I put articles describing the stuff, but then new people come along, “Oh! $25k per year. It must be such a terrible lifestyle.” So it’s an ongoing battle, but I’d say that pretty much anybody with the right mentality could have a similar lifestyle with similar cost, and you just have to add in any unique stuff. So if you have some healthcare stuff, sure you add that on, or if you have more kids, you can add in $3-4k per year per kid if you wanted to just compare yourself to the Mustache Family. Certainly it’s not a minimal lifestyle. A lot of peoplle do much better than us. It makes the savings rate pretty easy, the high savings rate pretty easy.
J: YNABers make pretty good money. I did a survey a while ago and they make good money. They’re learning how to manage it better, and be aware, and align their spending with what they care about, and I guess the point of this podcast here is to really ask yourself what you REALLY, really care about. So when..something trite..going to a movie, you really care about the in-theatre experience, with all of the people around you? Or WHAT exactly are you going for? Are you going for the family time? At its essence, could you get that family time back at home? So asking yourself what your core motivation is for taking whatever action it is. Going out to eat, for instance, “I love the social aspect.” I love that too. That’s way more fun than the food. But having people at my home is social, and healthier, and less expensive, and all of those things. I think at the core, when we question our values, and I’m always telling people when your money aligns with your values you start to feel content, but you really need to get to the base values, adn then ask yourself, okay I’m doing these things, what do I really care about?
M: So true. There’s a great little trick you can play on yourself, because people always think, “I’m happy when my spending aligns with my values.” The trick is to convert saving into one of your values, and give it a different name. I call it freedom. Every dollar you save is actually becoming an employee that works for you for life. Because you’re going to have it invested. When you’re deciding on the $100 dinner out for the third time in the week, you think would I rather spend on this? Or would I rather buy a little bit more of my freedom. Freedom is a pretty nice sounding thing to buy, and that’s really what you’re doing. You’re not depriving yourself–your’e buying freedom. As soon as you put it that way, people get a little more excited. I’m going to put 50k into my freedom this year, instead of saying I’m going to deprive myself of $50,000 of luxury cars this year. That sounds sad.
J: Reframing is a good idea. You’re investing in your freedom. You’re purchasing your freedom.
And you stay busy? You’re still making money and I know the blog has been an unexpected success for you because it resonates with millions of people. I know you do rentals, and love construction, so retirement is not the martini-sipping hammock situation that we all think it would maybe be. That would be boring.
M: Not every day anyway. Especially if you’re doing an earlier retirement, like the younger you retire the more energy you’ll have left over and you won’t have been destroyed by a 40-year corporate career. I find that everyone that I know who retired early, ends up doing a lot of interesting stuff. Sometimes it makes money, usually it does, other people are really charitably-oriented, so they just donate all their time and surplus money, either way it’s a pretty happy existence. It’s certainly not..it’s more energetic than your working life usually.
J: That actually makes a lot of sense. You kind of wander through the cubicles and there’s not always a lot of positive energy. Some people love their jobs and I think they should keep doing what they love, but there are many many more that would love to invest more in their freedom and get there a little sooner.
M: I can’t recommend it highly enough.
J: So YNABers savings rate..a lot of us are sitting at 10-15% and were feeling really good 32 minutes ago. And now we’re not. We’ve got a little bit of a challenge but I think everyone should start with squeezing out five percent, take a month to do that, to analyze and then take another month to look for another five percent. Since I started reading your blog in…February…I think I was a latecomer, I bumped my savings rate from 15 to 35 percent.
M: That’s a huge difference.
J: I’ve got more work to do yet. It is quite fun.
M: Your biggest enemy is the mainstream media because they’re the ones telling you about this five, ten, even fifteen percent savings rate. “yeah, it’s just compounding so magically! If you just save a dollar a day for 500 years, you’ll have hundreds of millions of dollars!” We don’t have decades and decades that we want to be working. Why not just increase that, with shockingly simple math we’re told that small increases make a huge difference in your freedom coming up sooner. So ten percent is really not a useful goal, unless you’re living right on the edge, you know if you’re in a poverty sit
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