Mr. Money Mustache » Weekend Edition http://www.mrmoneymustache.com Early Retirement through Badassity Mon, 29 Sep 2014 00:45:02 +0000 en-US hourly 1 http://wordpress.org/?v=4.0 The Colorado Meetup (and a report from behind the scenes) http://www.mrmoneymustache.com/2014/08/31/the-colorado-meetup-and-a-report-from-behind-the-scenes/ http://www.mrmoneymustache.com/2014/08/31/the-colorado-meetup-and-a-report-from-behind-the-scenes/#comments Sun, 31 Aug 2014 20:26:51 +0000 http://www.mrmoneymustache.com/?p=10225 newhouseAfter almost two months on the road, the Mustache family is really glad to be back in Colorado where we belong. Our extended absence (and the corresponding lack of updates to this blog) has fueled speculation among people with a bit too much time on their hands.

“He used to post way more often, but recently there have only been a few articles a month” … “Has Triple M run out of ideas?” … “Maybe he sold the blog!”

As is usually the case with speculations, these are all wrong. The list of partially written articles is longer than ever (I see 164 of them, or roughly a 3-year supply in the queue). I’m more charged up than ever about this job, the blog is reaching more people than ever with about 6 million pageviews last month, and I’m selling off the rental house and other distractions so I can devote more time to this fun stuff as well as writing The Book.

But I’ve also been trying my best to uphold the promise I made to myself before starting all of this: Real Life always comes before Internet Life, and family and real life friends come before Internet ones. So let’s start with an event where those of us in the immediate area of Longmont, Colorado can get together for real:

The Colorado Meeting of Mustachians
Saturday, September 6th, from 3PM – 9PM
At a public park right here in the historic district of central Longmont.

 I’d like to invite the locals out to come hang out.   I’ll gather a few BBQs for cooking and provide an acre or two of beautiful grass and trees for gathering.

You can bring along your family, friends, kids, food and drink, folding chairs and frisbees, and maybe even a slackline or two. Beer and wine are permitted as long as they are in inconspicuous non-glass containers.

Because of the size of past events and our town’s limits on public-park events, we’re setting it up on an RSVP basis using the EventBrite link below. There are 100 ‘tickets’ (which are free of course), and once you sign up your spot will be reserved. Then we’ll email you the final location on the day before the event.

Update: This event is sold out! In a single day on a holiday weekend. Nice work, fellow Coloradans – see you on Saturday.

(and my apologies to anyone who wanted to come but didn’t see the note in time. It just raises the bar for next time – we apparently have enough people around here to get a real venue .. and imagine what else we could accomplish with such a group!)

http://www.eventbrite.com/e/mmm-longmont-meetup-tickets-12779741551

Come out, bring your best ideas and even optional business cards, as I find the Mustachians are a like-minded, fun, and entrepreneurial crowd.

Bike transportation is highly encouraged, and we’re just a few minutes walk/ride from the central transit station at Roosevelt Park with direct buses to Boulder and Denver.

To finish up this weekend edition, here is a report on the the rest of the Real Life events that have been getting in the way of responsible blogging.

San Francisco (May 2014)

sf2

To celebrate the end of the school year and the arrival of summer, we hopped on Amtrak’s California Zephyr sleeper train and headed West, just to experience long-distance train travel for the first time. It was a very nice peek into the past and a great adventure. While the train was quite slow and the dining car’s food selection was uninspired, the beautiful views from the observation car made up for it. And the novelty of turning in after a good night of conversation and wine, then being gently rocked to sleep while the train travels through the night was one of my favorite parts.

sf_mustachians

Bay Area Mustachians, enjoying sunset at Heron’s Head Park

Once in California, I had the chance to meet with quite a few interesting people including one of the officials who plans out San Francisco’s bike network. His department must be doing a great job, as there were cyclists of all ages everywhere, and I was able to bike comfortably even in the densest parts of the city. San Francisco is truly moving toward Badass Utopia status.

 

I also hosted a gathering of Mustachians at the beautiful Heron’s Head park, which was amusingly enhanced by the arrival of a WSJ MarketWatch camera crew who did a few interviews to find out what we are all about.

The North Coast and Redwood Forest

north_cali_shore

At this point we rented a small car and headed North for a peaceful week of hiking and exploring the forests and coastlines of Northern California. The experiences and beaches were incredible, especially the harrowing cliff climb from our seaside VRBO rental down to the secret beach. Another highlight was a glorious Antimustachian indulgence at the Petaluma Whole Foods. We blew $30 on prepared luxury foods from the buffet and ate it in the meticulously crafted flagstone patio, overlooking manicured subtropical gardens and a parking lot packed with high-end hybrid and elecric cars and some of our country’s liberal elite ultraconsumers. Just for a moment, I envied their pleasant and convenient lifestyle.redwood

Portland, Oregon

3 Blog Night

A moment from Three Blog Night

After the family leg of the vacation, I parted ways from the wife and boy and took a short flight to Portland. Upon arrival I had the pleasure of meeting with a group of local readers for dinner, and spending the night on a couch in a basement apartment. The next day I walked across the precarious Sellwood bridge, stopped in at J.D. Roth’s apartment, wrote an article, then borrowed a bike in order to do a full tour of the city.

In the evening we hosted the Three Blog Night meetup and then went to dinner with Ryan Carson, the founder of a glorious online learning company called Treehouse.

 

 

 

 

Camp Mustache

The next day, J.D. and I carpooled North to Tacoma, Washington with Joe (RetireBy40) for the incredible honor of attending an event entirely organized by readers of this blog.

camp_mustache_lakeside

J.D. hosts a discussion called “Crazy Rich People Talk”

There were about 50 of us, and we shared beautiful lakeside views at the foot of Mount Rainier, food, friendships, and some excellent learning sessions on topics like real estate investing, bikes, home brewing, and advanced credit card hacking.

Moving to a New House (June)

house constructionUpon return and recovery from this blast of travel, we were suddenly faced with the emergency task of moving out of our old house, preparing it for sale, and then listing it on the open market. The incredible volume of stuff we had accumulated triggered the article called Recovering from the Pat Rack Years

Summer in Canada (July)

familykayak

Members of MMM Extended Family demonstrate our version of motorboats.

This was the usual mixture of family, friends, and Carpentourism. This year’s projects were a new roof on my Mom’s house as well as a new kitchen, plus assorted things at a scenic cottage owned by the inlaws.

9 Days in Ecuador (August)

IMG_2819

Just to push the limits on this ridiculous travel bonanza, I had to head straight from Ottawa, Canada to Quito, Ecuador in order to get to the Chautauqua event on time. A thunderstorm in Houston added an unexpected night’s stay in that city, but the magic of smartphone hotel reservations and some free credits I had amassed for UberX transportation ensured it was a pleasant break.

The Ecuador trip itself was spectacular and packed with lifetime memories.

And now, back to real life (right now)

I am so glad to be home, it is ridiculous. The boy has gone back to conventional school for the first semester (an update on the Homeschooling experiment is forthcoming), which gives me 6 peaceful hours each weekday to finish more of the house, meet with friends, write to YOU, and live a proper retired life.

We’re just getting started around here, so I hope you’ll stick around for the journey.

Love,
Mr. Money Mustache

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MMM Gatherings! San Francisco and Portland http://www.mrmoneymustache.com/2014/05/18/mmm-gatherings-san-francisco-and-portland/ http://www.mrmoneymustache.com/2014/05/18/mmm-gatherings-san-francisco-and-portland/#comments Sun, 18 May 2014 14:23:11 +0000 http://www.mrmoneymustache.com/?p=9911 lombard-street-picture

brewThe Mustache family is on the move for the next week or so, visiting the West coast for a variety of festivities. To make more of an adventure of it, we decided to take the California Zephyr train out of Denver and wind our way through the full splendor of the Rockies instead of just flying over top of them as usual. We’ve booked a room in the sleeper car and everything.

So I figured hey, if we’re going to be in these great cities anyway, why not set aside a night or two to get together with some of the many Mustachians who live there? After all, hanging out in real life is really what it’s all about – all this relentless upgrading of our finances is really just to set the stage for spending more time with people you like.

So with the help of a friend who lives there, we figured out a great bayside place to watch the sun go down at the end of this work week:

Friday, May 23rd at Heron’s Head Park in San Francisco

herons_head
Time: 5PM – 8PM+

How to Find Everyone:  Heron’s Head Park is in the southeast section of the City, where Cargo Way dead-ends in Jennings Street. The address is 32 Jennings. We’ll be at the picnic tables on the east side of the Eco Center. The Speakeasy Brewery is right nearby, so depending on weather or thirst, the party may adjourn there at some point.

Biking there: Highly encouraged! There is a tradition of riding bikes to these meetups, and then we proudly take pictures of the respectable Netherlands-style jumble of bikes not normally found in this country.

From points north, take the bike lane on Illinois Street (which parallels Third Street) rather than battling the cars on Third Street. For those biking from the west, take Cesar Chavez to Illinois (and Illinois to Cargo Way), because Cesar Chavez has a bike lane and at some points a separated bikeway. And for those coming from points south, look up Mendell Street as an alternative to Third Street. There is also the Bay Trail/5 bike route from SoMa, or the 60/68 bike route from the Mission

Bus Access: Take the 19 Polk to Evans Ave. and Jennings St., or the 44 O’Shaughnessy to Middlepoint Ave before Evans Ave. Then walk one block down Jennings St. to the EcoCenter’s parking lot. Or you can take the T line to 3rd & Evans Ave and walk east on Evans to Jennings St. Take a left and walk one block down to the EcoCenter’s parking lot.

Car Drivers: There is also plenty of parking in the region.

Special Request: A couple of female readers from the area wrote me to request that lots of eligible attractive single men come out. Given the readership of this blog, it seems probable.

Last Minute Announcements: You can stay apprised of these by keeping an eye on my Twitter feed that day.

After that, the MMM family is taking off for a few nights of hiking and touring in the Redwood forests further North. Then the wife and son fly back home, and I move on to Portland for this:

The Three Blog Night:

Thursday, May 29th at Sellwood Park in Portland

5PM – 8PM

sellwoodpark

We’ve booked Picnic Sites B, C, and D

This should be an extra fun shindig because I was able to entice two Portland friends to invite their own crews as well:  Tyler Tervooren the Advanced Riskology guy, and J. D. Roth, the Get Rich Slowly founder.

Rather than re-creating all the details here, I can just share this handy invitation that JD has crafted just for the event. He also thought up the name and did all the site booking and thus deserves all credit for this party:

Three Blog Night on jdroth.com

And the same suggestion for this night applies: last minute announcements (or if you need to get in touch with me) – see Twitter.

These should be a fun couple of evenings. There is no formal structure* – no speeches, no catering, bring along some food for the grills if you like and BYOB.  Just informal meet-and-greets to celebrate my favorite time of year and joy of people meeting each other. At past events, I have seen friendships, relationships, mountain bike rides, and small business ventures form, so bring your business cards along if you like!

From there, I get to finish my trip by carpooling to Seattle for Camp Mustache, and then heading home. If all this excitement has not destroyed me, there will also be a third, final, and yet-to-be announced meetup right here in Longmont, Colorado sometime after I return in early June.

What do you think? Will I see you there?

 

Notes:

Trains are fun. We only got the one-way ticket this time, but you can plan longer adventure vacations using the Amtrak rail passes available here: http://www.amtrak.com/rail-passes

Heron’s Head Park in San Francisco was described as one of one of SFGate’s favorite hidden parks.

*And just so you are not disappointed, I do not currently have the Giant Mustache from the publicity picture. I’ll be attending in my “mild-mannered engineer who occasionally types some shit into the computer” disguise.

 

 

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Fine Canadian Winemaking with Mr. Frugal Toque http://www.mrmoneymustache.com/2014/01/30/how-to-make-wine-in-canada/ http://www.mrmoneymustache.com/2014/01/30/how-to-make-wine-in-canada/#comments Fri, 31 Jan 2014 02:46:27 +0000 http://www.mrmoneymustache.com/?p=9002 Loading 'em up.
Clearly, a prime vintage has been produce.

Clearly, a prime vintage has been produced.

Foreword from MMM: Mr. Toque is back with more advanced Mustachi0-Canadian techniques! While the methods described within definitely work in Ontario, if you have similar tricks for your own area, please share them in the comments. In the mean time, at least I have my Bota Boxes..

—————

If you grew up like me, which isn’t terribly likely, then the moderate consumption of alcohol has been a part of social gatherings your entire life. Sometime around the age of eight or ten, your parents might have started offering you sips of their drinks. By the age of twelve, when the shot glasses were passed around at Easter or Christmas, you would get a trace of whatever was being drunk at the bottom of your very own tiny glass.

When you left home, you might have carefully added the beverage of your choice to enhance your enjoyment of a quiet evening of fellowship or a raucous night of step dancing to the latest Maritime fiddle tunes. (Again, your experience may vary.)

As discussed ages ago, a proper Mustachian is a person capable of enjoying his life without breaking his bank. Instead of going to a bar and buying round after round of expensive drinks, we clever lot gather in houses and back patios, ever respecting our neighbours’ right to peace and quiet, and enjoy our lower cost beverages and the camaraderie that comes from being able to control the musical volume and thus carry on conversations. If we do go to out dancing establishments, we have a few drinks beforehand and limit our further consumption of alcohol to that required to maintain our respective buzzes throughout the evening.

All that said, the point is thus: moderate alcohol consumption has been a part of our lives for some time and will continue to be with us for years to come. So let us see what we can do to optimize the cost of it.

A Little Bit About Sin Taxes

A short aside for those living outside of Canada. Around these parts, we went through a period of alcohol prohibition because of a thing called the “Temperance Movement”. Now before you curse it out, Prohibition wasn’t all bad. It allowed criminal organizations to grow like wildfire, giving us the Godfather and the Sopranos. As well, my grandfather ran rum into the United States during their Prohibition period, which is almost as good as having a pirate in your family.

When the Temperance Movement gave up, its laws were replaced with “Blue laws”, making it very annoying to get alcohol. You had to have a permit which got filled in every time you bought any booze. The liquor stores were to keep track of you and make sure not to sell you too much. Taxes were levied to keep people from turning to evil.

Even today, every province has its own strange rules. In Quebec, you can buy beer at a corner store. In Ontario, you can only buy liquors and wines at licensed “Liquor Control Board of Ontario” outlets and beer from either a “Beer Store” or from the LCBO.

As well, such things are heavily taxed in many jurisdictions.

However …

What If You Make Your Own Wine?

There’s a trick that was discovered a long time ago and it works in many provinces in Canada and, I’m told, many states down south. People who make their own wine don’t have to pay sin taxes. How could they? All they’re doing is buying grapes from somewhere – that’s totally not alcoholic in any way, is it? Then they ferment those grapes in their basements, bottle it and drink it. Where can the Puritan/Tax Man nab you? Nowhere.

Now you’re probably saying, as a Mustachian, “Whoa, there, Mr. Toque. That sounds like a lot of work and a lot of start up cost. There must be barrels and bottles and … um … fermenting stuff. Maybe, like, sulfites? Or something?”

You’re absolutely right. Who has the space for all of these barrels? Who has the corking devices? The know how?

Sounds tricky, and I’m a guy with a rumrunner on one side of his family and a whole host of wine farmers three generations back on the other side. More on this “trickiness” later.

Why Wine?

Why not beer? Why not make your own whiskey?

Those are equally valid things to make, as you suit your own tastes. One man’s finest Scotch Whiskey is paint thinner to his wife. One woman’s fruited wine is sugar candy to someone else.

For me, wine has always been the classy way to go. Just the scent of a nice, dark red is capable of putting me in a calm, serene frame of mind; that of a man prepared to let the world be as it is while it gently floats by his window.[1]

Ah.

But do I need to pay $100 a bottle. Hell, no. How about $20? That’s better, although I prefer, if I have to, to pick up a $10 or $12 bottle.

But Mr. Toque, what about tannins, and body, and bouquet! Don’t you care about those things?

Uh, no. I care about how good it tastes to me. I also resist, as is the nature of the ancient Stoics, becoming a connoisseur of material goods. Becoming the kind of person who can only enjoy the very finest and most expensive of anything, be it wine, automobile or speaker cable, is doubly wasteful.

First, you are foolishly using your educational time while you become an expert and second, you’ll have to spend the rest of your life incurring expenses as the price of having achieved such expertise.

Besides which, it’s been proven repeatedly – at least to my satisfaction – that most wine experts are just as susceptible to pretty bottles and wine glasses as the rest of us. But, hey, if you want to go on paying $200 per bottle of wine, you can skip this blog post and drive your SUV across town to that really good wine store. You should know, however, that every time you say, “I can’t imagine drinking anything that doesn’t come from the Loire”, the babel fish I stuck in my ear the last time I passed through the Betelgeuse system will always render this statement as, “I can’t imagine not drilling a hole in my head and pouring in battery acid every night.”

Back on topic, now, let’s see if we can’t get that $10 just a wee bit lower by eliminating the 19% to 29% taxes and a good deal of the marketing cost that goes into it.

How Do I Make My Own Wine?

Loading 'em up.

Loading ‘em up.

The answer is that you do the wine making on some other person’s property with that other person’s barrels. The laws for making your own wine, in the province of Ontario and many other places across Canada, require you only to take part in the bottling process. This has led to a large number of small businesses popping up all over the province where you can “make your own wine.”

So, on behalf of my northern friends and blog readers, I undertook to determine exactly what was involved in this process of “wine making.” Sure the wine comes out cheaper, but what about our time? Let’s find out exactly how much this process costs and how much effort it requires from the “winemaker.”

Step 1 – Order Your Wine

Go to a wine making place nearby. I’ve never yet heard anyone warn me away from a winery, so I just grabbed the one closest to the dojo where the Toque family does their karate lessons – this particular one was called The Wine Garden, but there are many similar facilities around town. I was pleasantly surprised to find that the place was exactly what I expected: just as friendly and relaxed as you could expect a place run by a married couple who spend all day around vat after vat of every kind of wine you could imagine.

You know when you walk in to the lumber yard, take a whiff of the sawdust and think, “Yeah, that’s the ticket.”

It’s like that, but with wine.

So you’ll meet the friendly staff and, given how casual things are, they’ll probably give you a tour of their facility and answer any questions you have. For us, this was half an hour or so, since I was collecting information for all of you. In theory, you could do Step 1 in about five minutes, but just try not to hang around for a bit whilst soaking in the atmosphere

Once you’re satisfied that the facility checks out, you decide what wines you want and in what batch sizes. You can choose from a wide variety of grapes or juices from which to make the wine. Organic is one of the options and they’ll have occasional specials, not so much by price, but by what sorts of grapes from what exotic regions.

Prices ranged from $4.25 a bottle to somewhere around $7 or $8 a bottle.

Mrs. Toque and I, being the frugal sorts we are, chose to make two of the lower cost 24-bottle batches, one of Merlot and one of Pinot Grigio, so we’d have a red and a white to test.

The first step was completed when we paid the 50% deposit of $102. I also scheduled an appointment, two months hence, at which time I would come back to bottle the wine.

Cost so far: 10 minutes (at most), $102

Step 2 – Bottle Your Wine

Two months later, I came back for the bottling. I arrived during my lunch hour, noting the time to be 12:07pm.

Without any rushing at all, because you just can’t be in a hurry when your nose is full of the soothing smells of so many wines mixed together, two wine barrels were tapped to fill a pair of containers capable of holding 24 bottles’ worth of wine each.

Each in turn is attached to a machine which pumps the wine simultaneously into four wine bottles. My job in all of this is to detach the wine bottles as they fill up (the machine will not allow overflows) and move them over to the corking device. I insert a cork, close the door, listening for a satisfying “fsh” sound and then remove the bottle.

A satisfying conclusion to the experiment.

A satisfying conclusion to the experiment.

The winery offers a device for heat-shrinking caps onto the top of the wine bottle and fancy decorative label stickers for you to attach. If you’re planning on taking this wine to a Fancy Gathering, you might do this to some of the bottles for show. You should note, however, that you do have pay $0.75 for each bottle and you have to clean the stickers off when you bring them back for reuse. So consider how many annoying heat-shrunk caps you want to scratch off and how many labels you want to remove.

The bottles are placed in cardboard boxes, one dozen per box. The boxes are closed and loaded in your car.

The last invoice is $102 for the second half of the wine payment and $36 for the bottles.

The time when I sat back down in my car seat: 12:37 pm.

Total cost: 40 minutes of my time, $240.

That means it’s $5 per bottle, including the reusable bottle, and less than a minute of my time per bottle.

Even if you went to the liquor store, which is what you’d have to do in Ontario, you’d still spend more than a minute per bottle, so I’d have to argue that we can ignore the time part of this equation altogether and just say that I’m getting wine at $5 per bottle and leave it at that.

Step 3 – The Taste!

Wine has two general uses in the Toque household: drinking and cooking. First, we cooked up a beef stew (plenty of vegetables and barley), adding a cup or so of wine. This came out delicious, modified as it was by all the pleasant flavours and aromas of the finest Merlot ever created.

Dinner, naturally, was complemented by the very same same wine. It tasted as excellent and luxurious as any red wine I’ve ever tasted at any convention I’ve ever visited. The aroma brought back memories of many similar evenings and the senior members of the household received the pleasant alcohol-induced relaxation they always do. If there is some subtle difference between this and the much more expensive varieties available from professional wineries, we found ourselves unable to detect it.

What else is there to say?

The effort to produce your own wine is minimal; the cost savings is at least 50% and the taste is indistinguishable from the finest. The only question is: why isn’t everyone else doing this?

[hr]

[1] – Also, please don’t go on about the value of “anti-oxidants” in red wine. The virtues of anti-oxidants, though much touted by marketers of anti-oxidizing products, have never been scientifically demonstrated. It may be that red wine is less bad for you than beer or whiskey, but let’s not pretend we know that for sure.

http://scienceblog.cancerresearchuk.org/2009/06/24/what-are-antioxidants-and-are-they-good-for-us-part-1/

And don’t get me started on that resveratrol stuff, either. The science on that is equally ‘meh’, unless you’re getting 60 litres of wine’s worth of the chemical – every day.

http://www.mayoclinic.org/diseases-conditions/heart-disease/in-depth/red-wine/art-20048281

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Canadian Investing with Mr. Frugal Toque: Part 1 http://www.mrmoneymustache.com/2013/09/21/canadian-investing-with-mr-frugal-toque-part-1/ http://www.mrmoneymustache.com/2013/09/21/canadian-investing-with-mr-frugal-toque-part-1/#comments Sat, 21 Sep 2013 15:40:59 +0000 http://www.mrmoneymustache.com/?p=8300 An exciting event is coming up in my group of old friends: another one of us is approaching Early Retirement.

toque_family_sandcastle

Scene from a recent FT Family camping trip

Mr. Frugal Toque, whom you may recognize from his many comments and occasional guest posts on this site, is a software engineer in his mid-thirties living in the high-tech belt of Ottawa, Canada. We survived the trenches of engineering school together in the 1990s, then got jobs just a few cubicles apart in the same big company after graduation. When I greedily took off to the United States in 1999, we inadvertently became a financial science experiment.

Certain key variables were kept constant: age, education, health, industry, graduation date, etc. And others were varied: I moved to a country with slightly higher salaries and lower taxes, while Toque got married and went to a single-income household a bit earlier, had two kids instead of one, didn’t make money on the side through buying and selling houses, and built up a slightly more expensive luxury compound in the woods for himself.

But financial independence is not a yes-or-no concept. Instead, it’s just a matter of time, and here he is roaring towards the finish line with a solid 65 years of freedom to look forward to. The mortage is just about crushed, and the retirement savings accounts have been maxed out every year for  well over a decade. Depending on windfalls, I’m guessing he will be independent within the next 18-24 months.

So this past summer, I challenged him to brush up on his Canadian investing and tax skills, since with he will soon be living off of rather than rapidly accumulating investments. And with Canada being the second largest source of readers, I figured his teachings are well worth a few weekend editions. This is a guy who tends to kick ass at anything he takes up, so I think we’re in for some good learning. First Edition Below.

—–

Oh, Canada! How shall I retire!
(RRSP versus TFSA)

I know that my country has a pretty bad rep when it comes to taxes. I stopped complaining about that sort of thing more than a decade ago when I realized the place has done pretty well by me and I understand that this costs money.

On the other hand, if you’re living in the U.S., you might have a very negative attitude about Canada where taxes are concerned. As a Canadian you might be one of those lamentable few who says that the Mustache family was only able to achieve its goals by moving south because taxes in the Great White North make it impossible here.

I’m here to tell you that this is nonsense, you have a case of Excusitis and are a Complainypants.

First of all, the income tax system is progressive – just like anywhere else – and a good chunk of the money you save in registered accounts won’t get taxed at the top marginal rate.

In Canada we have two major, easy to use options for growing our savings without the burden of taxation:

  • the RRSP (Registered Retirement Savings Plan)
  • and the TFSA (Tax Free Savings Account)

We’ll tackle the RRSP first, because it’s fated to be the road first traveled by a proper Mustachian (more on why in a moment). If you are earning money, you should have an RRSP account with your bank. Every Canadian bank I’ve checked requires you to actually visit a physical branch office and set up this account. For legal reasons, they need to personally assess your financial knowledge and have you sign certain forms. Some of this work can be done over the phone or the Internet, and rules are changing all the time, but you probably still need to do at least one physical visit.

How RRSPs Work

The money you put in to an RRSP account does not count as income for the year in which you make the deposit. This isn’t one of those lame “tax deductions” where you get 15% of the money back at tax time even though your marginal tax rate is 37%. No. The money you put in an RRSP, which is up to 18% of your previous year’s income, does not count as income at all. If your employer supports it, the tax will actually be deducted at source, so you don’t have to wait until March to get your refund.

That’s right. You can literally take 18% of your income [1] and dodge those terrible Canadian taxes you hear about!

But, wait, Mr. Toque. You’re not telling the whole story. Don’t I have to pay taxes on those RRSPs eventually?

Yes, you do. You pay taxes on them when you withdraw, during your retirement. Consider this though. You’re a Mustachian. That means you can support a family of four in luxurious style on about $24 000/year after housing expenses. If you arrange your finances correctly, dividing up your retirement funds with a spouse, the two of you will be in the lowest possible income bracket and end up paying almost no income tax.

That’s right. No income tax! In Canada! The law even allows you to put your money in a “Spousal RRSP” no matter how much your spouse earned. Your spouse withdraws this money during retirement as his or her income, not yours.

Where does the TFSA come in?

Alright. You’re frugal. You’re even wise enough that you set up automatic paycheque deductions so you don’t have to think about your RRSPs. You’ve already paid off your mortgage because you hate debt so much. So now you have even more money you want to ‘stash away. What comes next?

Enter the TFSA. Whereas the RRSP took pre-tax income, skipped over paying taxes, and required you to pay taxes on withdrawal, the TFSA works in the other direction. The TFSA is where you put after-tax income. The money can then grow, tax-free, inside the TFSA and will not be taxed when you withdraw. How much money can you put into TFSAs? It started at $5000 per year and is now up to $5500 per year. It accumulates over your lifetime starting when you turn 18, but the concept was only invented in 2009, so no matter your age, your accumulation can’t start before then.

Summary

RRSPs: you put pre-tax income in, it grows tax free, you pay taxes on the way out. (just like 401(k)s in the US)
TFSAs: you pay taxes before you put it in, it grows tax free, you pay no taxes on the way out. (Just like Roth IRAs in the US)

Straightforward? Good.

Now why will readers of this blog prefer the RRSP over the TFSA? Why am I doing that one first?

For the simple reason that a Mustachian is, by definition, a person who has expenses far, far below his or her income. What matters with an RRSP is the difference in tax rates between when you put money in and when you take it out. Thus, you’re in a relatively high bracket while you’re working and you’ll be in a relatively low tax bracket when retired.

Example: RRSP Benefits

Let’s take a wage earner in the province of Ontario who earns exactly $100k. We’ll say she’s a high tech worker with over a decade of experience, or maybe a high level executive manager of some manufacturing company. She has a non-working spouse, two children and no other deductions.

If she decides to put no money in her RRSPs, she ends up paying tax on her full income, amounting to $15 403 in federal taxes and $8 558 in provincial taxes.

If, instead, she decides to max out her RRSP contribution at $18000, she gets $18000 in her RRSP investment account and lower her taxes to $10928 federal and $5662 provincial.

Her total income taxes went from $23962 down to $16590, a change of $7372.

What this means is that she took back over seven thousand dollars that would have gone to the government and stashed it away. Another way to look at this is that it cost her $10628 to get $18000 in savings. Fabulous!

And again we’re back to the complaint from earlier. Won’t she have to pay taxes when she retires? Of course she does, but she’ll be paying it at much lower tax rates.

Let’s assume she’s living on $24000/a, a perfectly reasonable level of expenses, and plug that into the formula. We get federal taxes of $147 and provincial taxes of $439. So she can either have $17600 in her investment account, which will grow tax free inside her RRSP, or $10700 outside her RRSP, which will be taxed as it grows. You make the call. And before you do, add in the interest. You’ll find it just as relevant as it always is.

This is why Canadian Mustachians love RRSPs.

While my understanding of American financial issues isn’t all that strong, I hear a lot about “early withdrawal penalties” in the U.S. I can not find any sign, on any government or bank website, that this is an issue in Canada. While there are some rules about disposing of your RRSPs when you turn 71, we’re talking about early retirement here, so that shouldn’t be an issue. The only real concern you have is that you ought not to withdraw money from your RRSP accounts in the same year that you had work income. If you do that, the RRSP withdrawal will naturally be taxed at a high marginal rate, since it will be added to whatever you earned that year.

So retire in December and don’t take anything out until January.

Priorities: RRSP, TFSA, Mortgage

Presuming you have a mortgage, an RRSP account and the ability to save in TFSAs, your priorities (logically) ought to be:

  1. RRSP first 
  2. TFSA 
  3. Mortgage 

This assumes your mortgage is at a lower rate than the the 7% average you might expect from a stock index fund.

If, for some reason, your mortgage is up closer to 5%, you might consider the short term, reliable gain of killing the mortgage instead of saving in the TFSA. You’d still want the RRSPs to go first though, because they give you so much back on your income taxes.

The TFSA as a rainy day fund:

The strategy might change slightly if you have unstable work. You might be a seasonal worker, or in an industry that doesn’t reliably keep you employed. In that case, you might consider placing a higher priority on the TFSA. It is slightly easier to take money out of your TFSA than your RRSP, so having money in the TFSA is very much like having one of the those “rainy day” accounts that some financial bloggers go on about. You would still max our your RRSP, but prioritize your TFSA over making extra mortgage payments.

Last of course, are the hard core debt-haters like your very own Mr. Frugal Toque. Even though my mortgage is under 4%, I want that sucka dead. I want to dance a jig on its grave while pounding back a shot of throat-scouring whiskey. So my own priorities are

  1. RRSP
  2. Mortgage
  3. TFSA 

… although we keep some money in a TFSA for emergencies. [2]

The point of all this is that Canada is actually a very good friend of early retirees. The RRSP and the TFSA, with their attendant tax benefits, are very useful tools. How you use them and how you prioritize them, are obviously up to you. But whether you believe in rainy day funds or not, the tools are there waiting for you.

In my next column, I’ll discuss where we can actually put our money and compare the various mutual funds available and the corporations that offer them[3].

References

2013 federal and provincial tax rates:
http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html

Revenue Canada’s RRSP website:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/wthdrwls/menu-eng.html

Revenue Canada’s TFSA website:
http://www.cra-arc.gc.ca/tfsa/

[1] – If you don’t use the entire 18%, don’t worry, it rolls over and you can use in any later year. But you may sense a Withering Glare coming at you over the Internet. That’s me, wondering what the hell you’re doing saving less than 18% of your income.

[2] – To be honest we keep about four month’s expenses in a TFSA, even though the mortgage isn’t done. As you know, I’ve been laid off once before and the TFSA is a nice way to reserve money for such emergencies while also keeping it employed. It is in a proper Stock Index fund, not one of those “safe” money market funds, so technically it’s making a better payoff than my mortgage anyway.

[3] = Sneak Preview: In my research, I learned that President’s Choice Mutual funds blow. They’re just repackaged %ges of CIBC mutual funds. So you can’t actually get a Canadian Stock Index Fund, you get a series of Int’l mutual funds, all pre-packages in certain ratios. And you pay a 0.95% to 1.15% expense ratio for that privilege.

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You Can Spare us Both the Outrage http://www.mrmoneymustache.com/2013/07/28/you-can-spare-us-both-the-outrage/ http://www.mrmoneymustache.com/2013/07/28/you-can-spare-us-both-the-outrage/#comments Sun, 28 Jul 2013 13:33:16 +0000 http://www.mrmoneymustache.com/?p=7904 mercedesThe recent 50 Jobs post has been a nice success so far: I was happy with my own start to the list, but as expected the readers (as well as my celebrity guest contributors) got back to me with even better ideas. We’ll have an easy time bumping it up above 50 when Part Two comes out in the near future. But I thought we should pause for a refresher lesson in effective living, because there have been so many illuminating events recently that it would be fun to put them together.

It’s almost a law of the Internet these days: if somebody comes up with an idea or does something, there will be an immediate nationwide chorus of whining and rattling keyboards as a large number of people hasten to complain and express outrage about what they’ve just read. A few examples.

Regarding the Jobs post, lots of people took the “Gaw! Those jobs are impossible to get!” tack.. I put a few quotes together from Twitter* for your enjoyment:

some_twitter_job_complaints

Then there was that McDonalds Budget controversy earlier this month. Everyone got into a big huff because the low-wage fast food employer dared to publish a budgeting guide for their employees, with inaccurate values filled in to the example:

budget

News flash: it was an EXAMPLE. That means you put your OWN numbers into the blanks, rather than complaining about the estimates that came with it. Idiots.

Gasp! Went the outrage on this one.. “They didn’t allow enough for health insurance, and they totally forgot GROCERIES!”

And finally, you’ll see outrage whenever a story hits the news, and happens to feature people like you and I who are earning good money (“BLAUUGH! FUCK THAT PERSON LIVING IN FAIRYLAND WITH THE HIGH INCOME! REGULAR FOLKS DON’T EARN THAT MUCH!”),

or not spending all their money (“YEAH! NICE LIFE! TRY THAT HERE IN EXPENSIVEVILLE WITH MY 80 MILE COMMUTE!!”),

or for the general case of a story about anything at all, (“AND OBAMA FEDERAL RESERVE TOILET PAPER FUCKIN’ LIBERAL BLABLABLA!!”)

In a way, it is nice to see a bit of outrage. It shows that at least people are out there reading things on the internet and reacting, rather than sitting passively on the couch watching the TV news. But the outrage is on the wrong side of the divide.

Suggestion: Instead of boiling up a pot of anger based on your perceived inability to do something, why not throw it on the other burner – the one that gets you fired up about new possibilities about which you knew nothing before?

With this in mind, let’s review the outrage examples above to see how they could be re-phrased.

The ladies who didn’t like my list of jobs were suggesting that it was poor advice, because their own experience (or speculation) suggested that it is extremely difficult to get jobs like that and earn over $50,000. Yet the only reason I put those occupations on the list is because I have repeatedly met people who do all of those things, and dabbled in at least half of them myself, and found that they do indeed generate income at a greater-than-$50,000-per-year rate.. including this blog. All of this is new to me as well – ten years ago I was still an engineer and I would have told you that the only way to make good money was to get a degree and then work in high-tech.

I’m not putting things on this top-50 list to build false hopes so I can sell you courses or e-books. I’m doing it because I’m genuinely excited about the stuff I have discovered and happy to share it with a group that may be more focused on traditional employment. From what I’ve learned, making money based on sharing content through the internet is not a lottery. It is something that can be methodically and successfully done – as long as you have the required underlying talent and do the right research and work. Just like being a plumber, electrician, or carpenter. Not every job is a good match for every person’s DNA – why express outrage over that revelation?

Next there’s that McDonalds budget. It was a funny attempt by some out-of-touch corporate types, sure. But when I read it, rather than feeling outrage at the lack of a line item for heat or groceries, I had the opposite reaction:

“Wow.. even with a financed car, $100/month for “cable/phone”, and four times my entire houshold’s electricity consumption, these people still have $750 in “monthly spending money” remaining. Not bad at all! I’m outraged** that anyone would think this budget is sparse!”

And finally there is the outrage directed at high salaries in general and more of it at low expenses.

Sure, I briefly made a good salary in software in my 20s. And many people in the field earn much more: Bill Gates used to personally visit the campus of Canada’s Waterloo University each year and offer $100,000 starting salaries to the top 100 computer science and engineering students. And many of them would refuse the job offer in favor of even better opportunities. Many people of my age are now running companies or working in financial jobs where they earn millions, rather than hundreds of thousands per year.

And equally impressive, many others are living far more badass lives – being a ranger in Northern Alaska, touring internationally as a startup musician, growing most of a  family’s food on their own lots, while maintaining a full-time job on the side, volunteering and donating more than I do. Many people, most of the world in fact, lives on a tiny fraction of the supposedly frugal amount of money we burn up each year.

Should we be outraged at people who do something that we haven’t yet done ourselves? Or is it more productive to just say, “Hmm.. I hadn’t realized that was an option! I am glad to have it added to the broadening suite of fun things that I might choose to do in my life, now that I am getting the money part of things under control.”

In a sense, this shift in attitude really goes back to one of my favorite posts on this blog, the one called “The Practical Benefits of Outrageous Optimism“. In that one, I argue that the very act of believing in the viability of a bold plan, greatly affects the chances of you succeeding at it. Given that we know these things are possible, what benefit can be had by building a Whiny Wall between ourselves and the tasty rewards?

With this in mind, we will return to 50 Jobs -Part Two in our next post, where the potential jobs will be equally surprising, and yet not outrageous at all.

 

 

I hope you don’t mind me poking fun at you here, Nicole! I’m actually impressed that you took the time to make fun of me on your own blog, which is exactly where people should be expressing their most vigorous complaints (as opposed to in the comments section of this blog) But when someone actually copies me personally on Twitter by including the @mrmoneymustache thingy, it’s obviously an invitation for some public battle ;-)

**This is not meant to be a political statement that I think US minimum wage is too high. In fact, I’d personally make it higher myself, because if you run a business and can’t afford to pay people more than $7.50, your business model sucks. And if you can afford to pay more, but just want to keep more money for yourself instead and lobby congress in order to keep the official minimum so low, you might be a bit of a dickhead. I’ve never paid anyone less than double minimum wage through my own small businesses, and even then it was embarrassingly profitable and my wife asked me if I was sure I wasn’t being a dickhead for paying someone only $15/hr. 

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Two Great Paychecks from the Mustachians http://www.mrmoneymustache.com/2012/08/18/two-great-paychecks-from-the-mustachians/ http://www.mrmoneymustache.com/2012/08/18/two-great-paychecks-from-the-mustachians/#comments Sat, 18 Aug 2012 23:00:34 +0000 http://www.mrmoneymustache.com/?p=5142 umbrella

There’s a big, hidden part to this job of being Mr. Money Mustache that you don’t get to see every day: the stream of really neat emails that seem to constantly arrive.

These letters from readers are as interesting as they are varied. Some of them I read aloud to Mrs. Money Mustache, or to my son, or to friends. Although I only get a chance to respond to about one in ten, they’re inspirational to all of us, and I like to think of them as fine, sparkly paychecks that I get for writing this blog.

The main reason I write this thing is in the hope of inspiring a bit of social change. Improvements in our way of life by shifting away from buying and wasting, and towards learning and sharing with other people. With unusual wealth just being a convenient byproduct.  So when I read that people are actually putting this stuff to use in real life, and getting great results, it makes it all seem so much more real, and worthwhile. So thanks for those letters.

With that introduction, here are just a couple of interesting ones that came in from beloved Mustachians recently:

Letter 1: Avoiding a Lifetime Habit of Commuting

Comments: Hello Mr. Money Mustache,

I am a just-out-of-college, single, working, commuting woman with debt and a full-time job. I was beginning the job search for something closer and got offered a job. I did not necessarily like the job offered to me, so I thought, why don’t I just stay at my job for another year and see what I want to do after a year of commuting?

I googled, “is commuting worth it?”

Your blog post about the truth of commuting was one of the first options on the list given. I read it from top to bottom and I will never be the same. It shocked me that the cost of commuting was so high. I have grown up in a suburban neighborhood where everyone always commutes. Everyone does it. That’s just what you do…at least I thought. Never did I factor in the cost or the price of the time wasted.

Thank you for your inspiring post. I look forward to reading more as they are written! Hopefully your posts will help me get out of college-debt as well…if you’ve got any advice, I’ll take anything you’ve got!

I’ve decided to take the closer job (4 miles away instead of an hour commute one way) and buy a bike! WOO!

Photo credit: Matt

MMM Comment:WOW!! Avoiding this one-hour commute alone will save her about $75,000 every ten years in direct costs alone, or several hundred thousand dollars after factoring in the value of the time wasted. And that’s every ten years. All from one blog post? Astounding.

Especially when I look at the stats for that article and see that at least 103,000 other people read it on this site, plus ten times as many on the bigger sites that posted it like Lifehacker. The era of the long car commute MUST DIE!!

Letter 2: The Log-Cabin Mustachian

Comments: Dear MMM,

You have inspired me to submit to you my three favorite ways of being frugal:

My wife and I are really good at not spending money. We live on quite a bit less than $2k a month and have three sturdy, round-faced little brats.

Frugality is an important virtue to practice when you are a farmer and a musician, respectively. A taste for rice and beans six nights a week is also helpful. If I were more willing to learn the song “Freebird,” we could probably scale back our rice and beans intake to five nights a week, but alas, I have principles.

I say we are backwards Mustachians because we both grew up in families where consumerism wasn’t an option. I had nine younger siblings. My wife’s father saved money by buying expired meat at the store that was labeled “crab bait” and not using it for crab bait.

So we’ve always found it easy to live below our means – we’ve never had the means to do anything else. In fact, only recently have we had enough means for credit card companies even to be interested in us. We’re still working on the Mustachian practice of making lots of money and not spending it. We’ve got the “not spending” part down. I will keep reading your blog to help me figure out the other part.

But here are my 3 favorite ways of not spending money that I think Mustachians could appreciate:

1. Chopping my own firewood to get buff and heat my house

2. Having very nice neighbors who own tools (we owe them a lot of pies, but no money.)

3. Living in a nice house that I built for $30k in 2 years with no loans.

I’m not sure if #1 works in Boulder, but here on the west side of the Evergreen State it’s lunacy not to heat with wood- because it’s everywhere.

Our electric bill is $50 to $80 a month. Splitting and stacking firewood is great exercise and a full wood-shed is very satisfying thing to behold. Also, fresh chopped wood smells great.

Processing firewood is also a great neighborhood activity, after which, beer tastes wonderful. Making firewood saves more than electricity- it saves you the cost of a gym membership and I think it might save coal in some part of the world- though I am no expert in that department.

#2 is somewhat blind luck, but good relationships with helpful neighbors can definitely be cultivated, (or squandered. Non-monetary debt can be abused. I admit that I may have tested the line here on occasion.)

#3 is something Mr. Mustache probably knows more about than me, but every house has its own story and here is ours, briefly:

We built our house out of boards, beams, nails and “Simpson Strong Ties” and we own it. It even passed inspection – so we’re legal.

I used a lot of salvaged “free” lumber and other materials which were great, but time-consuming to collect and figure out how to make work. But these materials also give the house more quirkiness and character.

For example, every visitor to our house raves about our bathroom sink which my wife found at an auction for cheap. It is very colorful. A joyful sink. If it had come from Home Depot I doubt it would inspire that kind of enthusiasm from our visitors. My kids, however, are happy spitting their toothpaste into any handy receptacle.

Our house is wonderful to live in, even if I see a few of the boo-boos I made during the building, every single day. It is easy to heat with our wood stove. We incorporated an “inefficient” cathedral ceiling in our design which we have made efficient by stringing an indoor clothes’ line up there – eliminating the need for a clothes dryer.

Since we paid for all the materials out of our own shallow pockets and with $10k of generous gifts from family, we own it outright and have no loans to pay off.

The county values it at $120k. Since we spent $30k building it, you could say we made $90k building it ourselves. It was a very fun and satisfying way to earn $90k – even though it took us two years to build.

(Not two years of full-time carpentering mind you, but two years on the calendar. We also did other things to earn actual cash during this time. It would have taken me more than two years to earn $90k playing guitar gigs at the time, I can tell you.)

Now here’s the trick, since we took out no loans to build the house and it is all paid for, could we say that we earned a lot more than $90k? How would we figure the interest not paid on this deal? Perhaps you could help us out here Mr. MM.

I would like to think that we did better than a measly $90k, but I’m not sure.

MMM Comment: you are correct! For most people to amass $90k of home equity, they have to earn a much larger amount, then pay taxes, pay for their living expenses, battle the backwards treadmill of mortgage interest, and only at that point can they pay off principal of the mortgage. For most, it takes many years and several hundred thousand dollars of earnings to accomplish this.

You did it in just two years, while also working your regular jobs. That means you outpaced most $200k earners during those years, or leapt ahead more than a decade towards financial independence compared to most people with lower incomes. Congratulations!

I hope you’re having a great weekend.

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Early Retirement Can’t Work, Or I’d Have Heard Of It Before! http://www.mrmoneymustache.com/2012/07/08/early-retirement-cant-work-or-id-have-heard-of-it-before/ http://www.mrmoneymustache.com/2012/07/08/early-retirement-cant-work-or-id-have-heard-of-it-before/#comments Sun, 08 Jul 2012 22:40:02 +0000 http://www.mrmoneymustache.com/?p=4881

Little MM and I marveled at the fanciness of this toy, then went back to digging in the sand with sticks.

Today we’ve got a guest post from the esteemed Mustachian known as Arebelspy, who is also a Moderator over on the Money Mustache Forum. Since we’re both passionate about this particular idea, the article became a bit of a collaboration between Arebelspy and MMM.

Mustachianism Can’t Work, Or I’d Have Heard Of It Before!

There’s a fairly common doubt about the idea of Financial Independence and Early Retirement  that MMM and others espouse. Because it’s such a prevalent idea that one must work until they’re 65, people often doubt that retiring so much earlier than that could even work. The skepticism essentially boils down to this:

“If early retirement is that easy, why haven’t I heard of it before? It must not actually be possible.”

MMM has already shown the mechanics behind the idea, in the post The Shockingly Simple Math Behind Early Retirement.

I’m here to explain why most people have never heard of it before.

Today we have a unique opportunity to hit financial independence after only 10 or 15 years of work. Retiring in one’s mid-30s sounds crazy, but it is the unprecedented times we live in that makes it possible.

You see, 300 years ago, I’d likely be a toiling peasant. There’s no way I could save enough to retire. I’d need to be frugal just to get by.

100 years ago, the situation had improved for some of us, but overall it was still difficult to save much. A frugal worker might be able to save 10, 15, or maybe even 20% of his income, but probably not much more.

The difficulty of saving in the past continues to influence our thinking today: common wisdom suggests that you should be shooting to save those small percentages, because that’s what you could save, historically. This makes the 40-90% savings rates suggested by Mr. Money Mustache and his acolytes seem crazy.

But there’s a big difference between the economic situation of the average person 100 years ago and today. Compared to our incomes, the basic “cost of living” items have gotten much, much cheaper.

“But wait!”, I can hear the complainypants saying. “I hear stories (or remember) when soda was a nickel and a house cost only $5,000!* How can you claim goods are cheaper?”

The actual fact is, due to productivity and technology improvements, wages have risen faster than the cost of goods in real (inflation-adjusted) terms. According to information from the U.S. Bureau of Labor Statistics, real compensation per hour rose from 42 to 108 over the second half of the 20th century (normalized such that the compensation in 1992 = 100).**

This rising standard of living (made possible mainly by productivity improvements through technology) is the reason a Mustachian family can live on barely over $20k per year, even while the US median household income is about double that, and many in-demand jobs pay a single worker several times this amount.

This article from MIT gives a shocking fact that is key to why you can save so much to hit FI quickly. It says that “an average worker needs to work a mere 11 hours per week to produce as much as one working 40 hours per week in 1950.”

That means that in theory, the proceeds of the other 29 hours they’re working could be saved.

So here’s a scenario. Your grandparents, in 1950, could work and save 10% of their income after working 40 hour weeks, and the other 90% of their pay was spent on basic consumer goods. You should be able to do the same, but it’ll only take you 11 hours (and you should be able to save 10% of that, like they did, so really only 10 hours) to cover your basic needs. That leaves you with 30 of your 40 hours EXTRA cash that you don’t need to be spending on basic cost of living items.

In the 1950s they had TVs, cars, dishwashers, and more. At the time, they thought they were living at the peak of modern convenience with all of the new luxuries – even with a single wage earner.

So what have we done with our over-100% increase in disposable income since then? We’ve bought even more things.  Consumerism.

As a society, we go out to restaurants far more often than our grandparents did. Our houses are more than twice the size, and in expensive cities we’ve bid up land prices to the sky using cheap credit, negating much of our income gains. We have more cars, we drive them more, and they’re packed with more luxuries (imagine going back to 1950 and insisting on a 16-speaker 550-watt audio system in your Chevy!). We also have more shoes, about ten times the amount of clothing (if closet sizes are any indication), and we do much more interstate and even international travel. We tend to buy things before we have the money, adding the significant cost of interest payments to our monthly expenditures. And don’t even get me started on the topic of big-screen television sets.

We’re flush with more disposable cash than we’ve ever had in history, but we don’t even realize it. The rise of the dual-income household should have made us even wealthier. But instead it just gave rise to the lament, “Nowadays you need two incomes just to get by!”

We should be laughing as we have cashball fights in rooms full of $100 bills. Instead, all we hear is about the ever-increasing cost of living.

The MMM way is to simply roll back the luxury train just a few years, then take all that extra disposable income and save and invest it.

“But we need all the extra luxury, to compensate for the ever-increasing demands of our work lives!”

Wrong again – even while increasing our income, we’ve also tripled our leisure time in the last 100 years***. People actually used to spend much more time working, because their work was toiling in fields and factories without the benefits of standardized workweeks, overtime pay, or even weekends in some cases.

So you can work an easy week, still have a good standard of living, still save the vast majority of your paycheck, and hit FI in a resonable number of years.

You haven’t heard of this idea because it wasn’t possible even 50 years ago. It’s still not possible in many parts of the world today. And it may never be possible if you continue to follow the same path as most of your neighbors, who think that a $30,000 car is a reasonable part of a middle-class lifestyle.

But if you live in a first world country****, you’re in a unique situation never before seen in history: you can easily hit FI very quickly by saving all that disposable income.

Hopefully this post has explained why you’re able to do so.

* No comments about current day Detroit.
**http://groups.csail.mit.edu/mac/users/rauch/worktime/output_per_hour.pdf
*** http://eh.net/encyclopedia/article/whaples.work.hours.us
**** Germany’s another example:
http://gooddaytolive.wordpress.com/2012/05/01/may-1st-the-day-of-work-is-a-good-day-to-think-about-how-to-work-less/

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Guest Posting: Financial Independence … 23 Years Later http://www.mrmoneymustache.com/2012/05/26/guest-posting-financial-independence-23-years-later/ http://www.mrmoneymustache.com/2012/05/26/guest-posting-financial-independence-23-years-later/#comments Sat, 26 May 2012 12:00:48 +0000 http://www.mrmoneymustache.com/?p=4576 Foreword by Mr. Money Mustache:

A few months ago, a new reader showed up at this blog and  joined the conversation in the comments sections of the articles. It was a guy named Jim Collins. He was wise, funny, well-spoken, and skilled in the use of swearing. So I checked out his blog and learned more. It turns out he’s older than me (around 61 apparently), has had a long and interesting career in positions ranging from Tree Trimmer to Fancy Businessman and beyond.. and has been financially independent since around 1989.

Since that’s approximately the year I learned to drive a car, I figured this man would have quite a deep perspective on what life is like when you are not driven solely by the need to earn a paycheck. So I asked him if he’d be interested in sharing that perspective with us as a guest posting. “What has life been like since then? How do you fund your daily expenses, how has the  health insurance situation worked out, what do financial crashes feel like, and what is your overall advice for those reaching financial independence and/or early retirement?”

The following story is what he sent me in response:

It has Never Been About Retirement

For me it has never been about retirement.

I like working and I’ve enjoyed my career.

It’s been about having options. It’s been about being able to say “no.”

It’s been about having F-You Money.

It’s never been about this.
(Although, now that I’m 61 it’s getting closer.)

I started working when I was 13, even earlier if you count selling flyswatters door-to-door and collecting pop bottles from the side of the road for the deposits. For the most part I’ve enjoyed work and I’ve always loved being paid.

From the beginning I was a natural saver. Watching my stash grow was intoxicating. I’ve never been sure how this started. Might be hardwired into my genes. It might be my mother seducing me with the image of the red convertible I’d be able to buy when I turned 16. But that was not to be.

My father’s health failed and shortly there after so did his business. My savings went to pay for college and I learned it is a fiscally insecure world. Convertibles came later. To this day it stuns me to read about some middle-aged guy laid off from his job and almost instantly broke. How does anyone let that happen? Of course I know it is common, but still….

So, long before I heard the term, I knew I wanted F-You Money. If memory serves, it comes from James Clavell. In his novel “Tai Pan” (highly recommended BTW) a young woman is on the quest to secure 10 million dollars. She calls it her “Fuck You Money.” And 10m is far more than it takes, at least for me. But it put a face to the goal.

The other thing I quickly figured out is that financial independence is at least as much about being able to live modestly as it is about cash. Here’s my favorite parable:

Two close boyhood friends grow up and go their separate ways. One becomes a humble monk, the other a rich and powerful minister to the king. Years later they meet. As they catch up, the minister (in his fine robes) takes pity on the thin, shabby monk. Seeking to help, he says:

“You know, if you could learn to cater to the king you wouldn’t have to live on rice and beans.”

To which the monk replies:

“If you could learn to live on rice and beans you wouldn’t have to cater to the king.”

Most all of us fall somewhere between the two. As for me, it is better to be closer to the monk.

Enough F-You Money isn’t necessarily enough to live on for the rest of your life. Sometimes it’s only just enough to step to the side for awhile. I first had mine at age 25 when I’d managed to save the princely sum of $5000. This after working two years at 10k per year.

It was my first “professional” job and it had taken me two long post-college years supporting myself doing minimum-wage grunt work to find it. But I wanted to travel. I wanted to spend a few months bumming around Europe. I went to my boss and asked for four months of unpaid leave. Such a thing was unheard of in those days. He said “no.”

Back then, I had no idea that working relationships were negotiable. You asked. Your employer decided and answered. Done.

I went home and spent a week or so thinking about it. In the end, as much as I liked the job and as tough as I assumed finding another would be, I resigned. I wanted to go to Europe. Then a funny thing happened. My boss said, “Don’t do anything rash. Let me talk to the owner.”

When the dust settled we agreed on a six-week leave

(which I spent riding my bicycle around Ireland and Wales)

and a month of annual vacation going forward. That got me to Greece the following year. My eyes were opened. F-You Money not only paid for the trip, it bought me room to negotiate. I’d never be a slave again.

Since then I’ve quit jobs four more times and have been kicked to the curb once. Blame my short attention span. I’ve sat on the sidelines for as little as three months and for as long as five years. I’ve done it to change careers, to focus on buying a business, to travel and, the time it wasn’t my call, with no plan at all. I did it again just last year at age 60 and the intention is to remain retired. But who knows? I do like getting paid….

My daughter was born during one of these, ahem, unpaid leaves. These things happen when you’ve time on your hands.

Now 20, she has grown up with dad sometimes working 18 hour days and constantly away from home, to dad sleeping late and lounging around. But she always knew I was doing, for the most part, exactly what I wanted to do at the time.

When she was in first grade I went to a parent-teacher conference. My wife introduced me and the teacher said, “Oh! Mr. Collins. How nice to finally meet you. You’re the father who’s never home.” A period of lots of business travel.

But then shortly after 9/11 my company kicked me to the curb.

Six months earlier our division president had taken me to a congratulatory lunch for a record-breaking year. We were explosively growing and embarrassingly profitable. Over a bottle of fine wine we discussed my very bright future. It was the best job I’ve ever had. Great team, great leadership, great fun. Great money. I had just cashed a bonus check for more than I had ever made in a single year before.

A year later my little girl and I were sitting on the couch watching a news broadcast. The concerned news crew was filming people standing in a depression era style bread line. They were, the reporter said breathlessly, the newly poor suffering from job loss in the dismal economy. I was still unemployed and licking my wounds.

“Daddy,” said my little girl, “are we poor?”

She was gravely concerned.

“No,” I said, “we’re just fine.”

“But you don’t have a job,” she said. Thinking, I’m sure, just like those poor souls on the TV. It was, as they say, a teachable moment on the power of and need for F-You Money.

I like to think these experiences have taught our daughter the value of having money and the joy of work when you aren’t effectively a slave to it.

When she was about two her mom went back to school. It was during my business buying phase and I had lots of free time.

While mom was off evenings at school, little girl and I spent endless hours playing and watching The Lion King over and over. And over. I’ve probably seen that movie more times than all other movies combined. We still laugh remembering the tea-cup towers we built. These hours were the foundation of the relationship we’ve grown to cherish.

Even though I didn’t have a paycheck coming in, around then we also decided my wife should quit her job to become a stay-at-home mom. This was a very tough call for her. Like me, she’d been working since childhood and loved it. But the problem was mostly, without a job, she felt she wouldn’t be contributing. I was failing to convince her until I hit upon this:

“We have F-You Money,” I said. “We don’t care about fancy cars or a bigger house. If you kept working what could we possibly buy with the money that would have more value than your being home with our daughter?”

Far and away the best “purchase” we ever made, and we never looked back. So we had no working income. For those three years our net worth actually grew.

As for me, I failed in finding a business to buy. But the search morphed into consulting work and a couple of years into that a client hired me for more money than I’d been making at the job I’d left years earlier. Such is the price of failure in the USA. As Leo Burnett once said:

“If you reach for a star, you might not get one. But you won’t come up with a hand full of mud either.”

When we moved to New Hampshire my wife started volunteering in our daughter’s grammar school library. Their hours, of course, matched perfectly. After a couple of years they offered her a paid gig. It’s not the corporate job she’d been used to but it’s also stress-free and fun. She’s never looked back.

For the most part over the years we’ve been married (June 19th is our 30th anniversary) least one of us was working. That handily solved the tough problem of health insurance. During the early 1990s, when we had an over lapping employer-less few years, we bought a high deductible catastrophic health plan. It is too long ago to remember the details and they likely wouldn’t apply today anyway. But that’s what we’ll seek out if and when my wife decides to hang it up before we hit 65 and Medicare. For now she loves her school district job and the time off it gives her for our traveling.

On my own blog I’ve outlined what we own and why we own it so I won’t bore anyone here. If you check you’ll see it is the soul of simplicity. Three Index Funds and some cash.

You’ll also see I’m not a fan of the “multiple income stream” school of investing. Simple is, in my book, better. So no cattle, gold, annuities, royalties and the like.

My small pension from the one company where I worked long enough to qualify I took as a lump sum and rolled it into my IRA.

There are also a couple of leftover investments from earlier times. We’re burning those up as we need the cash. These represent the last remnants of the many investing mistakes I’ve made over the years. Most revolved around the idea that I could pick investments that would outperform the basic stock index. It took me far too long to accept just how vanishingly difficult a task that is. Three things saved us:

1. Our unwavering 50% savings rate.

2. Avoiding debt. I’ve never even had a car payment.

3. Finally embracing the indexing lessons Jack Bogle perfected 40 years ago.

Looking back what is striking to me is how many mistakes I’ve made along the way and yet those three simple things got us there. That should be encouraging to anyone out there who has made poor choices along the way and who is ready to change.

What a wonderful advantage a blog like Mr. Money Mustache provides. Set aside the specifics, just knowing that financial independence is possible short of winning the lottery is huge.

When my journey began I knew no one who was making the choices we made. I had no idea where it would or could lead. I had no one to tell me stock picking was a sucker’s game or, more importantly, that swinging for the fences isn’t needed to reach FI. That last alone would have saved me the $50,000 of my money Mariah International (a gold mining penny stock) burned thru while failing; and failing to make me rich.

So now I’m (again) retired and it feels great. I love not having to keep regular hours. I can stay up till 4 am and sleep till noon. Or I can get up at 4:30 and watch the sun rise. I can ride my motorbike any time the weather or my pals beckon. I can hang around New Hampshire or disappear for months at a time to South America. I post on my blog when the spirit moves me and I might even get the book I’ve always wanted to write finally done. Or I can just sit on the porch with a cup of coffee and read the books others have written.

One of my very few regrets is that I spent far too much time worrying about how things might work out. What a waste, but it is a bit hardwired into me. Don’t do it. Instead, live on less than you earn, invest the difference and avoid debt. Do just these three things and you almost can’t help but succeed.

But what if disaster strikes? My biggest fear these days, and this is evidently common, is a major health failure. That, of course, would derail everything. Moreover, if you live long enough it is inevitable. If accidents don’t take us, we all eventually sicken and die. Circle of life. (See, watching The Lion King over and over sunk in.)

The older I get the more real that becomes. My response has been to increasingly hold each day precious. I’ve become steadily more relentless in purging from my life things, activities and people who no longer add value while seeking out and adding those that do.

Financial disasters are less concerning. We can always adjust our living standard and we are open to moving to far less expensive corners of the planet. We might just do that anyway. It’s a big beautiful world out there. Money is a small part of it. But F-You money buys you the freedom, resources and time to explore it on your own terms. Retired or not.

Enjoy your journey.

You can read more neat stories from Mr. Collins in the areas of Business, Life, and Money (and if you search carefully, even Spaceships) at http://jlcollinsnh.wordpress.com/

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Guest Posting: It’s All Bullshit! http://www.mrmoneymustache.com/2012/04/21/guest-posting-its-all-bullshit/ http://www.mrmoneymustache.com/2012/04/21/guest-posting-its-all-bullshit/#comments Sun, 22 Apr 2012 02:07:25 +0000 http://www.mrmoneymustache.com/?p=4299 It’s the weekend, and that means Mr. Money Mustache has nothing to say right now. But the MMM reader we all know as Mr. Frugal Toque does! Here’s an interesting rant he sent me a few weeks ago, which I thought would be ideal for this weekend’s guest posting:

 

 

 It’s All Bullshit!

Subtitle: Tax Software: Only 5 days left of special St. Patrick’s Day savings!

There’s a thing that happens to your brain when you watch television and you absorb Consumer Culture directly from its Unholy Altar. Your mind is invaded, pervaded, often left unsated and your thoughts are superseded by the idea that all of this over-the-top marketing is somehow natural.

I received an email today entitled “Tax Software: Only 5 days left of special St. Patrick’s Day savings!” and something struck me as odd. As North Americans, we’ve seen this sort of eye candy so many times in our lives that we’ve grown desensitized to how stupid it is. As a Mustachian who doesn’t have a TV because he somehow forgot to upgrade to an HD receiver, I’ve re-engaged the non-consumer cogs of my reasoning centres just enough for this ad to make me twitch to its stupidity.

And it is stupid. Let me tell you: it is really, really stupid.

Consider the idea of tax software. In Canada and the United States, there is only one time of year in which it makes sense for the vast majority of citizens to purchase such software. The people who market such software have a problem. How can they sweeten the pot? What ultraviolet patterns can they place upon their flowery emails to attract the instinct driven Bumblebees of Consumption?

“Why, of course,” they say, “Let us attach to our flower a four leaf clover, the brand of the nearest holiday.”

But honestly, is it realistic to believe, as a sensible, thoughtful human being, that the purveyors of this software have not carefully analyzed the market and determined the correct price point for their software? Is there any sincerity in this “special deal”?

Of course not. This is the price they mean to set to make their business case. The “sale” is nothing but a gimmick, a drop of green food dye in an otherwise honest pint of ale.

It’s bullshit. It really is.

It was after I made this realization, with many months of non-television watching behind me, that I recalled all of the other holiday based sales: Thanksgiving; New Year’s; Boxing Day; Easter; Valentine’s Day. The list could go on and on. Why should one day be any different from another? Why should anything ever actually be “on sale”? The only real deals are the things they’re getting rid of because no one else would buy them. Everything else is just a trick to get you to think they’re offering a price that’s significantly better than normal.

They might not even be doing it on purpose. Does a flower “know” what it’s doing when it lays out those ultraviolet patterns? Does it feel pleasure at drawing the bee down into its pool of sweet nectar? Of course not. The flower survives because it’s attractive to the bee and the retailers survive because they lay out the patterns that draw in their own Bumblebees.

Don’t be a drone.

Turn off your television. Not just for a day, or a week, but for months. Don’t watch advertisements. Get yourself off all of those electronic mailing lists. All of these are turning you into a drone.

It will take a while, but as you un-program yourself, you’ll begin to see how stupidly the world is run. You’ll begin to scratch your head when you occasion to run across those ads in your everyday life. Their nectar will no long smell as sweet. Their clever patterns will no longer lure you in. You will no longer be a Bumblebee of Consumption.

You will be free, and every lungful of air you inhale will smell as sweet as anything the Consumption Fanatics ever waved under your nose.

 

Thanks Mr. Toque, and I hope everyone had a great tax season. I for one am greatly relieved that the calculations are done, the bills are paid, and I can look forward to another year of ‘stashing.

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Maximum Mustache March – Update http://www.mrmoneymustache.com/2012/03/24/maximum-mustache-march-update/ http://www.mrmoneymustache.com/2012/03/24/maximum-mustache-march-update/#comments Sat, 24 Mar 2012 12:00:40 +0000 http://www.mrmoneymustache.com/?p=4042

Hiking the Dunes

Wow, this special month of ours is really zooming past.

By the time you read this, the Money Mustache Family will be deep in the high desert of Southern Colorado, camping out at the Great Sand Dunes National Monument.

But I thought it would be handy to share some thoughts on the hardcore savings challenge some of us have embarked upon this month.
The best part of the challenge is simply seeing people excited about hacking their own lifestyle to bring themselves greater efficiency, and having fun in the process. Check out this recent comment from a reader:

There’s still a week left in March, but I’m doing so well! Turns out that by bringing in my lunch every day (why stop at 3-4 times a week?), the frugality seeped into other areas of my life as well – I’ve gone out for dinner just once per week, and I’ve done absolutely no extraneous shopping. The results? I’m going to be saving close to 60% of my take home pay this month! I guess saving “at least half” wasn’t an ambitious enough goal!

Next on my list: I’m going to see if I can get my phone moved over to the company plan (fingers crossed!), and then I’m going to break the news to my cats that we’re living a frugal lifestyle now and they’ll have to make do with slightly cheaper food.

Nice.. very nice. Now I not only have consumer products companies, husbands, and wives begrudging my frugality-spreading ways, but cats as well. I should probably stop publishing my picture all over the place soon.

The MMM family has embraced the challenge as well, with the following points of success:

  • The car has only been used three times this month (two for hiking trips just outside of town, one trip to the store for building materials)
  • Grocery spending is down, due to more vegetarian home cooking, some tweaks to the menu (food planning article still in the works), and reduced impulse shopping on my part for things like dark chocolate and various organic foo-foo food temptations.
  • I made a plan to accept one day of paid work, but it ballooned into about four partial days for various people, yielding at least $600 in extra income for the month.
  • We scaled down our road trip – the original plan was to get all the way out to Vegas and even the Grand Canyon, but once we plotted out the days of our young lad’s spring break, we realized we could stay plenty busy and have fun without traveling so far. And save a bundle in the process.
  • Both Mr. and Mrs. MM. did exactly zero lunches and dinners out, and made zero purchases other than groceries (excepting of course the supplies I bought for my work days, which were billed to clients). This seems to happen pretty often, actually – we already have so much stuff that shopping is only necessary in the rare months that something wears out.

The final thing I did, just to put the Maximum in MMMarch, was signing up for another one of those ridiculously-high-cash-bonus credit cards in order to get the $500 signing bonus. A couple of months ago, I did an article on a $400 business card I signed up for. I was a bit skeptical, but the transaction did go through, I collected the bonus, and I ended up keeping the card and just abandoning my previous business card.

When setting up the credit card referrals page for this blog, I found a $500 Visa card in the mix, so I applied for that one as well. In theory, I will actually get a commission for signing up for a card from my own website, plus the bonus. Now THAT is maximizing the mustache. I promise myself that I won’t spend all my free time doing stunts like that, but just this month I thought it would be fun. This is the card I used , in case you decide to try the same thing*.

When you add up all of these efforts, I estimate that I earned or saved about $1900 more than I would have if the challenge had not been thrown down. With so much already chopped out of our spending compared to the average middle classers, I find that income boosting has a bigger effect than spending cuts for our family. But for people with fixed salaries and high expenses, the opposite will be true. Either way, I’m excited to invest my $1900 to further boost the stream of lifelong investment income. (At 5%, it translates to an extra $100 per year for as long as I live!).

Regardless of the specific actions we’re all taking for MMMarch, I am hoping that the overall experience turns out to be like the one in the quote above. Setting short-term challenges and making things a game for yourself can be a powerful way to trick yourself into acquiring new habits that actually stick.

In our household, we’ve created permanent improvements in our eating habits, just from trying a few new recipes this month and finding that they were easy to make and rather yummy.  I’ve really been sticking to my workout regime and expanding on it, and while it seemed like hard work the first week, it now seems like an easy habit to follow from our vantage point here at the end of the month.

I hope you have had a great month as well. What have YOU discovered about frugal living and even extra income this month?

 

Editorial note: The camping trip has us out until Monday night. Unpredictable writing schedule until then. Try the Random Article Selector above whenever you want to pretend there are new articles.

*Be warned that this blog will get a ridiculously nice commission if you do get the card through my link, so if you don’t want that to happen, you can also apply directly on the Chase website.

 

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Boxed Wine: Not Just for Your Alcoholic Aunt Anymore http://www.mrmoneymustache.com/2012/03/17/boxed-wine-not-just-for-your-alcoholic-aunt-anymore/ http://www.mrmoneymustache.com/2012/03/17/boxed-wine-not-just-for-your-alcoholic-aunt-anymore/#comments Sat, 17 Mar 2012 11:57:55 +0000 http://www.mrmoneymustache.com/?p=3946 A couple of Januarys ago, I spent a nice sunny day in my outdoor workshop doing some carpentry. I was helping a friend build a fancy Adirondack chair for her own patio. After we finished our work, she insisted on paying me with a huge pan of some delicious homemade dinner, and a box of wine.

The food was a major score, since this girl can cook like a demon. But the box of wine turned out to be even more profitable, because she had opened my eyes to a whole new world of wine buying that has saved me hundreds of dollars since then. And now I am pleased to pass those profits on to you.

The wine she brought to me was called a “Bota Box”. As you can see from the picture, it comes in a stylish and hipster-friendly box made of unbleached recycled cardboard. The most interesting part of the box is that picture of FOUR wine bottles down in the corner. That’s right – one of these boxes, which is shorter and easier to carry than a single wine bottle, contains an equal amount of the good stuff to four 750mL bottles.

The benefits are many, and there are no drawbacks. This Bota Box wine, as well as several of its competitors like my current favorite “Banrock Station”, is some really good stuff. The quality is comparable to what you’d find in $10-$15-per-bottle wine in my own area, which translates to what Antimustachians would pay about $35-45 per bottle for in a restaurant.

I’m not a wine snob, as that is a highly unprofitable affliction to develop. But I can still appreciate the difference between the very cheapest bottles and the midrange stuff most of us buy. (As you might expect, I have also experimented in the ultra-cheap zone, but unfortunately the sheer badness at that end of the spectrum forced to move back up a little).

But the Bota Box costs about $20 per box, which translates to $5/bottle. Banrock has been on sale in my area recently, so I picked up a couple boxes at $13 each (regular price $18, which means I am getting great wine at $3.25/bottle*.

This is a significant find for party people. I know of many young couples who consume a bottle a week between them at $10 a shot. Using my usual rule of compounding (multiply a weekly expense by 752), this burns up $7520 every ten years.  Switching to the boxes at my current sale price saves them $5076 of that amount. In other words, you could cut your wine bill by almost 70%, even without having to cut down your drinking!

Having the wine in a box also adds novelty to a party. You set it up on a shelf, and when you’re ready for a refill you push the red button and watch wine rapidly flow into your glass. There are no downer moments when you realize the bottle is empty after just one round, and there is no forced extra drinking to “Kill the Bottle”.  It’s like having great red wine permanently on tap.

The other benefits are practical as well: These boxes stack efficiently and don’t have the extra weight of glass, so they are ideal for road and camping trips. You can whip one out even in a public park where glass is prohibited. The container lasts forever when left closed, and still over a month at room temperature after opening, because the wine is stored in a vacuum-packed foil bag so it is never exposed to oxygen.

And finally you save a good percentage of the natural resources normally used to melt,  form, ship, and recycle four glass bottles. At the end of your drinking, you’re left with an ounce or two of recyclable cardboard and a very tiny quantity of collapsible plastic.

It has been over a year since my friend showed me this new trick, and I haven’t felt the need to buy a single glass bottle of wine since then. I hope it enhances your weekends as much as it has mine!

 

* Only people with access to Trader Joe’s can beat this level of value, and alas, TJ’s does not yet exist in Colorado. Also, we haven’t fixed our liquor laws to allow alcohol sales in standard food stores yet. Biggest drawback of the state, in my opinion. But at least there are still nice privately-owned liquor and wine stores everywhere.

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Book Review: The Intelligent Asset Allocator http://www.mrmoneymustache.com/2012/02/17/book-review-the-intelligent-asset-allocator/ http://www.mrmoneymustache.com/2012/02/17/book-review-the-intelligent-asset-allocator/#comments Fri, 17 Feb 2012 13:00:06 +0000 http://www.mrmoneymustache.com/?p=3556

What’s your style of investing: Stocks, or Bonds? And if you say “Stocks”, are you fond of Small Cap or Large Cap, and would those be in the categories of Value or Growth, and in US, European, Asian, or Emerging Markets?

I’ve learned that readers of Mr. Money Mustache vary widely in their response to a question like this.

Some will immediately scoff at the simplicity of it, slicing each of the investment types above into further subcategories and then commenting on their appropriateness given our current position in the business cycle.

Others will discount stocks and bonds entirely, muttering something about “Federal Reserve toilet paper” and “Fiat money”, before talking about their portfolio of precious metals (and at the extreme end of this position, stockpiles of canned food, guns, ammo, defensible land and tinfoil hats).

And quite a few of us will say, “I have no effing idea – I just checked a few appropriate-looking boxes on my company’s 401(k) signup sheet and I’ve got the rest of my ‘Stash in cash  because I don’t feel comfortable enough to invest massively in stocks!”

One of the goals of this blog is to get the latter category of people to get off of their asses and start learning about real investing. You do this by reading books – you might even start with those mentioned in the Book Recommendations page right here on MMM. But you must do it.

The good news is, you don’t need to know anything about investing to start saving for financial independence and early retirement. Learning frugality and how to live an efficient lifestyle is by far the most important part. Paying off all your debt is a good first step. And after that, while your savings are still small, your loss from not investing is small.

The bad news is, every $100,000 you have sitting around in a 1% bank account is missing out on about $6,000 per year compared to what you’d get by investing it well. Right now, it is actually shrinking, since it is growing more slowly than inflation. Your hesitance to read a few investment books is costing you $500 per month, for each hundred thousand idle employees.

So I’m writing this post under the guise of a book review of The Intelligent Asset Allocator by William Bernstein, but it’s really more than that. An understanding of Asset Allocation is a useful and necessary brick in your understanding of stock market investing, and it is something I’ve never covered properly on this blog before, so here we go!

Let’s start with the concept. In a long-ago article on stock investing, I described the basic idea of an index fund and suggested that you don’t have to know anything about individual stocks. You just need to find the right index funds, with the lowest management fees. By using the Vanguard investment company (www.vanguard.com), you get this without any further research.

But in that old post, I oversimplified things by only mentioning the VFINX index fund – a fund that holds only very large US-based companies. That’s still a good no-brainer investment choice for long-term growth, but the concept of Asset Allocation takes it up a notch by offering less volatility (which we all understand thanks to the past decade) while sacrificing little or none of the long-term performance. To understand how this could be, check out the following example:

Imagine you start with a $1.00 investment.
Now you start flipping a coin. If the coin comes up Heads, your investment goes up by 30% For Tails, you lose 10%.

After one coin flip, you could be one of two places:
Up 30% so you have $1.30 : there’s a 50% chance of this
Down 10% so you have 90 cents : also a 50% chance

But what if we start over and split our money in half and add a SECOND coin, and bet 50 cents of our money on the outcome of each coin?
After one flip, you could be any one of four places:

Two Heads:
both of your fifty cent chunks went up by 30%. The are now 65 cents each, totaling $1.30.
Two Tails:
Both chunks are down to 45 cents each. You have 90 cents.
A Head and a tail:
One chunk is worth 65c, the other is 45c, you have $1.10
A Tail and a head:
One chunk is worth 65c, the other is 45c, you have $1.10

Note that each of these outcomes has an equal probability of happening: 25%. But notice how you now have a three out of four chance of making money, and only a one out of four chance of losing it on any given flip. Over time, flipping the single coin and the double coins will yield exactly the same long-term returns: an average of a 10% gain per flip. But flipping the double coins will provide much less volatility.

As it turns out, you can do almost the same trick with stocks by understanding the principles of Asset Allocation (also known as Modern Portfolio Theory) explained in this book. Although it’s not a new idea, it is still quite magical, because we are getting less gut-wrenching volatility without compromising on the long-term return.

The reason this works is because the results of the separate coin flips are uncorrelated. To re-create the smoothing effect of flipping two coins with stocks, investors need to find stocks (or “asset classes”) that are also not correlated.

At the most basic level, this is the idea of “diversification”. If you buy one randomly-selected stock on the stock market, and I buy twenty, on average we might be expected to earn the same annual return, but your stock will swing wildly while my mixture of twenty will tend to cancel each other out and move more smoothly.

But if you look more closely at a graph of the share prices of two large US company stocks, even in different industries, you will find that they are still heavily correlated. They zigzag up and down together in response to the short term diaper crappings of market speculators over irrelevant news headlines. Similarly, if you compare the movements of a stock index of ALL the large US companies and the movements of ALL the small US companies, you’ll see a similar correlation. With correlated assets, you don’t get the full benefits of the double coin flip, so you can’t shake the volatility.

But Asset Allocators have figured out a way around this. By studying detailed historical price charts of many types of assets (stocks and bonds of  multiple countries around the world), they have found an appropriate mix of healthy investments that tend to move much more independently of each other. Bonds, for example, often move in exactly the opposite direction of stocks.

The book offers interesting explanations on how this all works out mathematically, but let’s just skip directly to the end result: You get the best results by owning at least four asset classes.

If you only want four, the author suggests you might hold these ones, by simply plopping 25% of your investment portfolio into each:

US Large-capitalization stocks (as measured by the S&P 500 index)
US Small-cap stocks (the Russell 2000 index):
Foreign stocks (the Europe, Australasia, and Far East index, also known as EAFE)
US short-term bonds

If you wanted to do all your investing with Vanguard funds as I do, you might throw 25% each into VFINX, VB, VDMIX, and VBISX.

Now you’re nicely diversified and owning slices of thousands of companies across the world with only those seventeen capital letters. It is truly an amazing and convenient world we live in. But there’s one last step: rebalancing.

The book explains that due to various market manias, occasionally one of these asset classes will start to inflate into a bubble, even while others will drop in price. To take advantage of this, you sell the funds that have appreciated, and use the proceeds to buy the assets that have gone on sale. Once per year, you simply make the appropriate mix of sales and purchases to set all of your allocations back to 25%, and you have effectively done a “buy low, sell high” move without even knowing what companies you own.

To beginner investors, this sounds crazy, and to advanced ones, it sounds like “well, DUH!”. But if you read enough investment books, they will convince you that the math and statistics behind all of this show that rebalancing works out quite well over the long run. You get reduced volatility and increased returns, with very little effort.

And the convenience goes even further: there are even index funds that will do this asset allocation and rebalancing for you! Vanguard’s VBINX fund, which I have recommended in the past, automatically maintains a 60/40 split of US stocks and bonds. There are surely other funds out there which will do a full 4-way round-the-world allocation as well (if you know of one,  let me know and I will update the article).

So it’s a good book. Financial and engineering nerds will eat it up. But people who find even this article’s attempt at an introduction to the topic confusing will probably want to start with a more general-purpose investment book, like The Four Pillars of Investing, by the same author.

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Book Review: Free at 45 by Canadian Dream (Timothy Stobbs) http://www.mrmoneymustache.com/2012/01/21/book-review-free-at-45-by-canadian-dream-timothy-stobbs/ http://www.mrmoneymustache.com/2012/01/21/book-review-free-at-45-by-canadian-dream-timothy-stobbs/#comments Sat, 21 Jan 2012 22:16:02 +0000 http://www.mrmoneymustache.com/?p=3249 Imagine an alternate version of Mr. Money Mustache. What if I had suppressed some of my profanity, become just slightly less hardcore in my frugality techniques, and moved to Western Canada instead of the Western US? Who would I be?

You may already be aware of the real-world simulation that exists to model this situation, his name is Timothy Stobbs, and he is the author of the blog Canadian Dream: Free at 45, and the book Free at 45 : How to Retire Early and Happy.

I had the pleasure of reading this book during my recent vacation and was pleased to note how well it had been put together. Since it’s the Weekend Edition and I’m way behind on my book review program, I thought I’d share a quick review of the book with you right now.

About the Author: I came across Tim and the Canadian Dream blog shortly after MMM was born.  Maybe the connection was through Early Retirement Extreme, or maybe somewhere else. But it turns out that somehow, all of us small-time financial bloggers end up getting to know each other. Eventually we will all start holding regular meetings to play poker and smoke cigars in executive boardrooms while wearing 1920s hats, but we are not yet powerful enough for this.

From the wisdom of his blog and his book, and the concept of retiring at 45, I had assumed that Tim was older than me, like 43. But the book says he was born in 1978 – just a kid! This makes the mature perspective even more impressive. Watch this guy, he will surely become quite a sage with even more age.

So on to the book.

Free at 45 addresses early retirement from a different perspective than many of the most popular books. First of all, it does not set an age limit on the activity. It is a turnoff to me when books assume people will be done raising children and starting to experience physical decline when they retire. I like the idea of leaving the door open to any age of retirement, and this book does that.

Secondly, the book maintains a focus on understanding happiness rather than replacing most of your pre-retirement income. There are hints of the concepts of hedonic adaptation and stoicism in some of the happiness chapters, even without explicit reference to the terms. These things are the key to the whole deal: financial independence works much better with a free mind, rather than one that has chained itself to high consumption as a substitute for understanding actual human happiness. Chapter four, entitled “What we Need” is particularly nice in this area, describing the hierarchy of needs as described by Chilean economist Manfred Max-Neef:

Sustenance (food and water)
Protection (safety and shelter)
Affection (love and friendship)
Understanding (making sense of life)
Participation(being part of a social process)
Leisure (time to reflect on things, daydream, and relax)
Creation (making things)
Identity (knowing who you are)
Freedom (choosing for oneself)

When writing the book, Tim did something I have never thought of doing myself: He interviewed actual retirees. Then he gathered their perspectives and advice along with his own experiences when baking them into a book. That’s a good strategy, and it leads to a more flexible message than Mr. Money Mustache’s strategy of just telling you about his own early retirement experiences. I just may be cribbing from this idea myself in the articles to come.

Tim and I do have our strategic differences regarding how much frugality is ideal, which one could have already predicted by comparing our retirement ages.

In the book, there is a graph from a US study suggesting that the happiness vs. money curve peaks at an annual income (and spending) level of about $75,000. I’d suggest this is a bad spending number to shoot for because it represents the average result of a population of people with absolutely no Mustachian training. The amount of money required for peak happiness drops rapidly as your Badassity increases.

Another area of the book that made my Mustache bristle just slightly was the talk of “extreme” early retirement. To paraphrase “Some people choose to retire extremely early, which might require extremely low annual spending such as $24,000 per year. But you can kiss the typical North American lifestyle goodbye if you make this choice”.  If you review my lifestyle from the 2011 spending article, you can see that I have certainly not kissed very many material things goodbye – at least not when measured by factors like the quality and size of my house or the food, health, education, and travel that the MMM family enjoys. Similarly, the idea of retiring while you still have young kids was treated with a certain amount of fear – another taboo I have enjoyed breaking.

On the “Wholeheartedly Agree” side, I enjoyed the second half of the book’s simple presentation of the technical details. How to start by correctly assuming that your retirement spending should have nothing to do with your income level – earning more does not make you need more of anything to be happy. How to calculate investment returns and passive income requirements. How to account for special outlays like university assistance for children or extra travel. He even nicely described one of my own longstanding beliefs, that frugal people are partially immune to inflation because we watch the prices of things as the years pass, and are willing to adjust our lifestyle as needed to avoid getting suckered.  (Oil prices rise faster than food prices? Spend more time cooking and less time traveling! Opposite thing happens? Reverse the strategy!).

He also covers a bit about understanding risk so you don’t get suckered into spending unnecessarily out of fear. “Safety is an expensive illusion” is one sagely quotation in this area.  In many cases when you do the math, it works out much better to take a risk than to pay to protect yourself against the worst possible case of an unlikely event. (Life insurance for a two-earner family strikes me as one perfect example).

I also enjoyed the Canadian-ness of the book. It is refreshing to read a book where the author is not obsessed with health insurance. In Canada, you take care of your own health, and the society takes care of any medical bills. And it’s all done at about half the cost per capita of what we spend here in the US. It’s a wonderful thing and we should copy it to the best of our ability. It is also nice to hear about Canada-specific issues like the TFSA, RRSP, and of course litres, kilometres, and extremely cold winters.

This will surely boost the appeal for Canadian readers, since they are often stuck reading US-based publications (like MMM itself) and then mentally adapting the advice to their own country.

The book is casual and non-scientific, much like the writing you would find in a good blog. Some might even say the presentation is too casual and concise, but this is actually a positive factor in my opinion, because frugality and financial independence are more about attitude than science. In the modern world of publishing, we are all free to write and publish our own books, and the world is a richer place because of it.

So, thanks again Tim for sharing your book with me and with the world. If a Money Mustache Manual ever comes out someday, I’ll be sure to return the favour ;-)

 

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She’s the DJ, I’m the Rapper (1 Million Page Views) http://www.mrmoneymustache.com/2011/12/10/shes-the-dj-im-the-rapper-1-million-page-views/ http://www.mrmoneymustache.com/2011/12/10/shes-the-dj-im-the-rapper-1-million-page-views/#comments Sat, 10 Dec 2011 07:02:32 +0000 http://www.mrmoneymustache.com/?p=2889 Today was a slightly exciting milestone in the life of this blog, in that it reached the one MILLION page views mark, measured since the day it was born on April 6th, 2011.

Some additional interesting figures: It has been around for nine months (although it feels like many years), and the Google Analytics stats page says there are might be about 25,000 regular readers and 5,000 RSS subscribers. Altogether, about 205,000 unique people have visited the site at one time or another. They made 424,000 visits at an average of 4 minutes each, meaning that on average, 104 hours of reading have been done each day. We’ve written up over 4,300 comments together.  Any way you slice it, there are at least a small city worth of Mustachians out there, which I find quite exciting!

Just today, for example, I learned that some guy started a blog called “Toward Mustachianism“, where he studies up on the concepts here, and applies them to his own high-income/high-spending (but dropping rapidly) lifestyle – and will surely see great results.

On a personal level, I have found this new role as Mr. Money Mustache to be quite a golden life booster. It is so much fun to get a chance to write down all these ideas and rants that have circulated in my head for years.. and have actual people read them and write back to share more. I feel the added challenge of thousands of imaginary eyes watching me when I feel tempted to make any sort of wussypants decision in my daily life. It has brought out many good laughs, and even brought me closer to some friends and family as well as finding some new friends out there around the world who I hope to meet in real life.

I mention all of this mushy stuff because I wanted to use this milestone as an excuse to say THANKS to my wife, Mrs. Money Mustache, for forcing me to start writing this blog. I was content to just occasionally write stuff down in an old Google document whenever it came to mind, with no interest or desire to ever publish it anywhere. But she set up this fancy blog system and reserved my previously-imaginary domain name, and then just left the whole thing sitting up there online, empty, taunting me, daring me to publish some shit. Since then, she has kept improving it and tweaking it, letting me know about mentions we received from other writers, and generally keeping things going.

That part is the key, because from what I’ve learned, it is unusual for a  blog to grow this quickly or even as large as it has. There are lots of technical hurdles involved and hidden side tasks, which I was not badass enough to spend the time to figure out on my own. Without her, I’m just a guy typing some shit into the computer, an activity which doesn’t just automatically create a fun community like this. It’s much like our family’s kickass roadtrip vacations, where she loves planning them out in meticulous detail, at which point I get to just hop into the driver’s seat of the fully-packed car, glance down at the already-programmed GPS, and say, “Ok, so where are we headed first!?”.

When it comes to poking around on the Internet and figuring out how to get things done, Mrs. Money Mustache is the bomb. That is one smart lady, and when she gets an idea in her head, she works non-stop and implements it and irons out all of the creases until it’s perfect. I respect that greatly, because it’s the formula for success in most forms of work.  It has also been great to have her as an occasional writer and commenter on the blog itself, and hopefully we’ll hear from her more often in the future.

Meanwhile, I’m not that great of a blogger, because ever since becoming a parent I tend to spend most of my time away from the computer. While I reassure myself that this is essential to be a REAL Mr. Money Mustache who has an actual life to write about, it does mean that I tend to let a lot of details slip in the blogging world. Story ideas get thought up but then forgotten, emails go unanswered, and more complicated articles requiring research sit around half-written. I apologize to the many dedicated people that write in every week with ideas and questions which do not get the timely attention they might get with a full-time blogger. It makes me feel a bit uneasy, because I don’t really like doing a half-assed job at anything. But oh well, at times like this we must take our motivation from the Honey Badger and just do it.

Over time, even small efforts like this can build on themselves and collect into a bigger success, and that’s my goal, the reason I will stick around and keep having fun here with you. Hearing every day from people who have sliced out their long car commute or made lifestyle changes that completely improved their lives is an incredibly good feeling. I can’t stop, as long as there is good stuff like that going on, and the scale of everybody making changes in their lives is much more than anything I could accomplish by myself. By one calculation, this blog has indirectly wiped out over 1000 person-years of average rich-country consumption already!

And there is SO much more to be said and learned! I noticed there are now 152 articles on this blog (equivalent to the length of a 600-page book!), but looking in my Drafts folder, I see there are MORE than that many unwritten ones waiting for further details or the right time to share them. More of them get added every day, as part of conversations at the kitchen table or out on the town with friends.

So for the foreseeable future, the Mustache must continue to grow. Thanks for making it happen!

 

(cover art and title is a takeoff of the 1988 album from oldschool rappers Dj Jazzy Jeff and the Fresh Prince).

 

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Book Review: Early Retirement Extreme http://www.mrmoneymustache.com/2011/11/12/book-review-early-retirement-extreme/ http://www.mrmoneymustache.com/2011/11/12/book-review-early-retirement-extreme/#comments Sun, 13 Nov 2011 04:19:02 +0000 http://www.mrmoneymustache.com/?p=2597 There is a small but growing social movement spreading around the world these days. It started long ago but has been accelerating recently. Although this revolution is tiny when measured as a percentage of the population, it has the Fiery Heart of a Golden Lion and thus it gets an unusual amount of shock, admiration, respect, and jealous complainypants scorn when it comes into contact with the rest of our society.

I’m talking, of course, about the Early Retirement movement – (also known as “financial independence” for those who still subscribe to the old-fashioned definition of “retirement” as never doing any form of paid work again).

It’s difficult to define the starting date of the revolution, because there have probably always been oddballs who realized early on that they could save and invest their money and then live off of the resulting income.  But some mark 1992 as an important date in starting the modern trend, because that is the year that the book Your Money or Your Life came out. That book started spreading the idea that money isn’t just for spending – it is really a form of life energy that you can keep for yourself in order to free up time.

Another big step in the Early Retirement movement was when Jacob Fisker, a fellow thirtysomething retiree, started writing his blog called Early Retirement Extreme back in 2007. By creating his series of highly detailed and analytical articles on the subject, I think Jacob  was giving a clear voice to the financial independence scene that was not readily available on the Internet before that point.

Common financial wisdom, then as well as now, has been something like this:

“Obviously, modern life is very expensive, so you’ll have to spend aaaalmost everything that you earn, no matter how much that might be. With the tiny sliver that you do manage to save, you must invest carefully for 30 years or more, until you get to a ripe old age and you have several million dollars of investments that allow you to continue spending just as much for the rest of your life! Cruise ships, wheelchairs, Cadillacs, and  a $50,000 wedding for each of your twenty-seven grandchildren”.

Jacob’s more logical voice of the Early Retirement movement instead said this:

“Obviously, we are all spending way the fuck more than we need to in the Western World and it is a complete waste of all of our time, energy, happiness, and the entire planet. So let’s analyze our true needs as humans and figure out efficient ways to meet all of those needs. Then we’ll enjoy our new more natural life while continuing to earn a rich-world wage for a few years. Since the earnings will be far more than our spending, we will save and invest it, and the work portion will quickly become optional”

I am of course paraphrasing a little bit, since Jacob doesn’t swear as often as Mr. Money Mustache does, but I added the f-bomb to make sure you knew that the idea was very important.

The interesting thing about the Early Retirement Extreme blog, (know as “ERE” by its followers in The Movement), is that it grew into an entire book by the same name. Mr. Fisker worked on his book on the side even while he continued blogging, collecting and refining his fanciest and most detailed writing on the subject,  eventually publishing it in both paperback and electronic (kindle/pc/smartphone/whatever) forms.

And being both a follower and fellow preacher, Mr. Money Mustache realized it was essential to read this book in detail and report back with this Book Review for you.

If I had to sum up the Early Retirement Extreme book by inventing my own title for it, I would call it, “The entirety of human civilization and thought, expressed as a series of equations and graphs”. It really is that broad-reaching, and densely packed. I had to read it carefully over a period of several weeks, because I found that individual sentences sometimes packed in multiple entire concepts, each one being the type of thing that I’d normally spend a whole Mr. Money Mustache article explaining.

Let’s just take one random passage from early in the book:

The Cost of Specialization

It’s obviously more expensive, both in time and money, for Person A and Person B to gain the required amount of knowledge in both fields X and Y than it is if A were to concentrate on X while B were to concentrate on Y. In this way, both can gain the same depth of knowledge in half of the fields, in half the time. Alternatively, they can get twice as much knowledge in the same field in the same time. It follows that the more a field is further split up into subfields, the less expensive this knowledge gets. These cost savings can be used to reach even deeper levels of competence (see this figure).

That’s a complete explanation for why we all have such boring and unsatisfying jobs and lives in general, yet Fisker just brushes through the material as a quick background on his way to teaching you how to design your wardrobe (“Now create one outfit by drawing lines, for example, “black jeans #1″, “Black socks #1″, “Red sweater”, etc.), and everything else, with scientific precision.

There is also plenty of philosophy. In the Kindle edition of the book, you get to see which passages other readers have highlighted. The most popular one is this:

When you identify with an object, you’re defined by the object, then controlled by it, and ultimately owned by it. If you relate to your possessions, you’re owned by your stuff, and it will make many of your decisions for you. This trap is not only mental, but also physical.

Looking through all of the top highlighted passages, I see that the more emotional ones related to the thought that our society is crazy and we’re defined by pointless materialism are the winners.

And indeed, those things are true even while they are very rarely acknowledged in the news or in conversations held between people who are not part of The Movement.

But my own favorite part of the book was in the description of the “Renaissance Man ideal”. This is the idea that you will have the most enjoyable life, AND the best chance at very early financial independence, by developing a whole load of interesting skills. The amazing part is that these skills don’t just sit independently in your mind like a bunch of unused kitchen appliances in a pantry. They start to reach out and connect to each other in unexpected ways, and start solving all of your problems for you. They build your curiosity and start sucking in still more skills that you can’t help acquiring. And before you know it, you are able to live a superb life on only a tiny fraction of the spending that a normal person does, even while you might end up accidentally earning money even more easily than before you embraced the Renaissance Ideal.

This section of the book put into more advanced words the same thing I have been raving about on this blog, which is the idea that you should insource rather than outsourcing whenever possible. I stumbled only accidentally across this idea when I quit my specialized software job and started the house building company. The range of activities and people I became exposed to, when going from a lonesome cubicle software developer to a small company owner, changed everything. Since then, a chain reaction of useful new experiences continues to this day. And I have at last learned to appreciate the chance to learn new skills instead of dreading them (because these opportunities often come disguised as big hassles that you have to deal with unexpectedly at various points in your life, and you have to saw your way through the big smelly log of Dung to get to the golden nugget of opportunity hidden deep within).

So it’s a valuable book and if you read it carefully, it will definitely teach you new things. I will, however, throw in a critical side to this review. And that is just that the book is a little bit serious for my tastes. The engineer side of me appreciates having things laid out with the utmost in logic, just as I loved pretty much everything that Spock and Data ever said on the Star Trek shows. But the rest of me thinks that we need to have heart-touching personal stories, satire, mocking, and plenty of foul language if we are going to make a point. (On the other hand, it is nice that this particular market niche has been left open for Mr. Money Mustache to fill!)

Therefore, the ideal reader is probably a well-educated person (i.e., not a Dave Ramsey or Mister Money customer). Perhaps a Silicon Valley worker who is currently spending most of his enormous salary and needs to hear a well-thought-out counterargument to his current assumptions about life. Or maybe even some of my own friends and former coworkers.

Regardless of the style, this is a book like no other, and that alone may make it worthwhile checking out. And the author is a good guy, making an outsized contribution to the rich world by challenging its very foundation. So he maintains his status as a Grandfather of the Mustachians.

You can pick up electronic or paper versions of the book at Amazon.com if you want to dig deeper into the Early Retirement movement, even while you support a valuable piece of work.

 

 

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Book Review: Will This Guy Really Teach You to be Rich? http://www.mrmoneymustache.com/2011/11/06/book-review-will-this-guy-really-teach-you-to-be-rich/ http://www.mrmoneymustache.com/2011/11/06/book-review-will-this-guy-really-teach-you-to-be-rich/#comments Sun, 06 Nov 2011 06:53:41 +0000 http://www.mrmoneymustache.com/?p=2526 Part of my duty to you as Mr. Money Mustache is to research the entire field of personal finance and investing, and report back to you with any significant findings. We need to know if there are any competing ideas, bloggers, or book authors that have something valuable to offer us. We also need to know when there are silly and Anti-Mustachian ideas in circulation that need to be mocked.

So today I must make a little confession to you. Ever since I wrote the Frugality as a Muscle article back in June, I have had a secret obsession with Ramit Sethi. I think I really like the guy, based on his writing style and the fact that he makes everything exciting with his habit of thinking big. He’s also quite hilarious, in that “witty and tenacious Indian guy who pokes fun at the tenacious nature of Indian people” way. For example, one of his primary pieces of advice for tricky situations is “Negotiate like an Indian”. Another recommendation is that during a conversation with a friend in a coffee shop, you should turn and throw your muffin across the room so it smashes into pieces against the wall, then turn back to them with wide eyes and yell, “DO YOU DOLLAR COST AVERAGE!?!?!”.

I feel right at home with this vibe, because many of my university friends and engineering coworkers had moved here from India and they had the same energy. And Mrs. Money Mustache herself is 50% derived from an Indian background, and thus even my son has scored a 25% share. Meaning we all get a refresher course in the whole Devoted Immigrant Entrepreneur culture whenever we visit her folks back in Canada.

Despite the many positive things I have to say about the guy, if Ramit Sethi and Mr. Money Mustache ever meet in person I fear a deep crack will form in the dry earth beneath our feet and a great chasm will open up, leaving Ramit tottering dangerously on one side while I stand solidly on the other. This is because of our deep philosophical divisions on the role of frugality and efficient living in a rich person’s life.

To resolve all of my waffling between admiration and scorn (and perhaps yours as well), I decided to actually take the time to read his entire book, called “I Will Teach You to Be Rich”. I wanted to see if he could convince me to change my opinion, if I spent ten hours poring over his masterpiece. So let’s see what he had to say.

What it boils down to seems to be,

  • Get out of Debt
  • Set up automatic payroll deductions and bank account transfers so that you end up saving some of your earnings (including investing in index funds)
  • Get in the habit of actually phoning your service companies (phone, insurance, credit card, cable) to ask them for better service and interest rates
  • Get better negotiating and job-hunting skills so you can score better jobs and positions in your jobs

Doing useful things like these is called “Focus on the Big Wins”, and his enticement is that if you do these things, you can afford to spend the rest of your money on the “things you love”, guilt-free.

It all sounds sensible, and I believe Mr. Sethi deliberately made it a minimalist plan because his target audience is partly fresh-out-of-college kids with credit card debt and a Spring Break/Daddy’s Credit Card/Bikinis/Jeep-Wrangler-With-an-Automatic-Transmission-Cruising-the-Strip-on-South-Padre-Island  level of financial sophistication. He points out that since most people do absolutely nothing with their finances, and end up flushed down a toilet of debt, then by just learning these basics, you’ll be better off than 90% of the population.

In many situations, I’d be happy to be in the top 10%. But when it comes to financial skills and early retirement, we need to move that decimal point over a few places to the left. Self-made financial independence at a young age is not difficult in this country… but yet I’ve noticed it is incredibly rare. That’s why you’re reading Mr. Money Mustache, right?

If I had kept my job and started a blog about how I was busily spending all of my nice office worker salary, nobody would want to read about it. But since I’m the one freaky guy who DIDN’T buy quite as many cars and televisions as everyone else, then it’s a more interesting story. “Hey.. wait a minute.. you’re saying WHAT happens if I don’t spend all my money? I get to quit working and do whatever I want? Well shit, why didn’t anyone tell me that before!?!”

But in this book, you won’t find that option presented. Check out, for example the rough guide of how much of your money should automatically go to various places:

  • Fixed Costs (rent, food, “car payments”, internet, phone, etc): 50-60%
  • Investments (savings): 10%
  • Savings for additional special spending (vacations, wedding, downpayment on house): 5-10%
  • Guilt-free spending on the things you love: 20-35%

Again I can see what he’s getting at – saving 10% is better than what most people do – but by planting the idea that you spend 90% of what you earn, and only save 10%, he’s automatically setting someone up for about a 50-year working career. Even if he moved another 10% from the other categories over to “Investing” to yield a 20% savings rate, you would have cut the career from 50 years down to 36.

Young minds are impressionable. You can plant the idea of Lifelong Firehose Spending, or a Big Money Mustache, and either one will take hold. I’ve heard from 18 and 19-year-olds that have just become excited about saving and investing instead of borrowing for that first 1.9% interest pickup truck they were previously interested in, and it warms my heart.

Just a few more quotes and facts from the book that illustrate our differences:

  • “In investing, all we need to know is a few smart things to invest in, then we need to go away and let our money grow for thirty years”
  • Even after becoming a personal finance blogger, he bought himself a new Honda Accord on credit with a 4.9% dealer loan
  • A story is told about a friend with $3000 in credit card debt, who spends $650 per month going out to restaurants. The advice was to call the credit card company to drop the interest rate on the balance from 18% to 15% so that the balance could be paid off in 18 instead of 22 years
  • He points out that weddings cost an average of $28,000. Then he provides a table of how to save for a wedding of this cost ($333 per month for 7 years starting at age 21).

I understand that the psychology behind some of the weaker ideas is, “People are just weak-minded flabby zombies and you can’t expect them to exercise self control. The best you can do is to get them to make tiny, automatic changes to their lives. Baby Steps”.

But I also understand there is some value to providing a good role model. Instead of telling people a few small tips, why not provide a complete role model that completely shocks people out of complacency, like the idea that you can become FREE 30-50 years earlier if you set yourself free right now from the idea that spending is a source of happiness?

“Spend on the things you love” sounds like a nice soul-satisfying message, unless you pause for a while and think, “Wait a minute – what if I don’t love THINGS? What if I’d rather Spend time on the things I love, rather than spending large sums of money on them? What if my spending level and happiness are actually completely unrelated?

So the personal finance part of the book is clearly Anti-Mustachian, just as I expected. At best, it should be called “I Will Teach You to Stay Out Of Trouble”.  But let’s move on to the last third of the book – what I consider the good part.

Ramit is a super-hard-working entrepreneur. He comes up with neat ideas, plans and develops the shit out of them, then finds ways to package them up nice and clean and simple and get people excited about them. He demonstrated this skill first by applying for and winning $200,000 of obscure college scholarships to allow himself to go to Stanford University for free, then by starting his now-famous blog about six years ago, then writing a book that he pushed into massive popularity, not to mention making all sorts of entertaining YouTube videos and television appearances on big nationwide shows. Every time I look at his site, there is something else new that he’s up to.

In the book, he shares some tips on how to apply the same attitude towards getting a job and negotiating a salary. There’s a nice example about how one of his friends did really extensive background research on a company before going in for her first interview for a marketing position. She also had prepared three fancy campaign ideas and even practiced the presentation and the speeches with him before going to the interview. Because she did so much more than the other candidates, she blew them away and got the job and a huge raise. But the actual work involved was only about 30 hours – for a $30,000 raise. His quote on this type of activity is very wise: “It’s the behind-the-scenes work that really makes you rich”. It might be grueling and not very fun, but taking the time to truly impress important people with more influence than yourself, and then get up in their face so they can give you a helping hand upwards, really is the highest-paid work a corporate worker can do on an hourly basis.

It’s just a matter of what you do AFTER that, that makes all the difference. By working hard and working smart, you can earn an ever-higher income. But a high level of income doesn’t make you rich. A high level of investments, which work for you even when you are sleeping, and compound like a snowball on a steep hill, is what makes you rich.  Investments are equal to earning minus spending. If your spending goes up with your income, you don’t get to retire any sooner.

So I’m sticking to my guns: work hard, save harder, become financially independent, THEN start doing the work you love for the rest of your life, without such a strong burden of materialism distracting you. You’ll have the freedom to pursue your passion, and income will just be an interesting side-effect rather than a constant requirement.

Is the book still worth reading? Yes – especially if you are a financial beginner, and especially since books are free to those following the Mustachian way of using the library. I’d just suggest reading it with a side dish of triple M.

And even after all of this, I still secretly want to go eat chicken wings and drink beer with Ramit in San Francisco someday.

 

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