How Rich are You? Find your Net Worth, Spending, and Savings Rate

wheel of consumptionMr. Money Mustache can tend to get a little high-level at times, talking about all these feelings and philosophies that underlie the proper path to wealth.

But you can’t just smile your way to the top – there are real numbers at work in the background, whether you understand them or not.  These can gang up and torture you (as in the case of a person with a crushing 60-hour workweek who maintains a paltry 10% savings rate), or they can boost you right out of a mandatory work sentence in unprecedented time.

This is especially relevant in the wake of the annual spending article, which always brings up a lot of questions about how Mustachians accumulate wealth so quickly. So let’s start with the big picture, which is how to become wealthy:

Financial Independence in 3 Easy Steps:

  1. Figure out how much money you are taking home and subtract the amount you are spending.
  2. Be sure to keep all that surplus money at work, by paying down high interest debt first and then investing the rest.
  3. Once the total value of all your investments reaches 25-30 times your annual spending, paid work is now entirely at your discretion. For life.

So with this post, let’s explain these three fundamentals of rapid wealth accumulation the MMM way, so the schooling will be there for all future students.

Net Worth

We’ll begin with the end in mind. Net Worth is a bit of a degrading term, as it incorrectly implies a person is only worth the amount of money he or she has accumulated. But you can use this for motivation, since as a Mustachian your figure will tend to be unusually high.

The overall formula is easy:

The Value of everything you own (-subtract-) The total of all your loans

The details are equally easy, although sometimes debated. So I’ll tell you the way I happen to think about it:

  • You do include the value of any properties you own, including your primary house
  • All 401(k)s, IRAs, savings plans, and other hidden assets are included
  • All mortgages, loans, credit card balances and other nonsense get subtracted
  • Don’t bother with depreciating consumer stuff like your cars,  furniture, or Apple products, unless you are willing to sell them right now.

Let’s start with a deliberately twisted example:

Joe Consumer (age 33) is a Washington DC Lawyer pulling down $250,000 per year.

He has a condo he paid $517,000 for with a current market value of $580,000 and a mortgage of $460,000. He also has a BMW 535i sedan that cost him $61,300 including tax a few years ago, payment is $539 per month and remaining balance is $43,000.

401(k) balance is $50,000, IRA is $27,300 and he has $90,000 left on his Harvard student loans, which he plans to get serious about soon and pay off over the next 10 years. Credit card balance is just a bit high at $8,000 right now, what with the holiday season hangover. What is his net worth?

Whoo! Look at that collection of financial spaghetti.  Oddly enough, when people write to me with financial problems this is usually how they are described: a big list of confusing and unsorted details. They just heap them on a plate and hope it will straighten itself out some day. When you’re confused about your own money, it is likely that you are wasting a lot of it.

Joe’s Net Worth

Ownership of the Condo: $580,000 – $460,000 = $120,000
Retirement accounts (401(k) + IRA): $50,000+27,300 = $77,300
Student loans, car loan, and credit cards: $-90,000 + $-43,000 + $-8,000 = $-141,000

Total Net Worth: $120k + $77.3k – $141k = $56,300

If you ask the average Josephine, Joe is a successful rich guy, doing very well for a 33-year-old. Expensive house, flashy car, massive income and even some money in the bank. If he just keeps on the current path and saves a bit more during those “peak earning years” in a couple decades once he makes partner, he’ll have a nice fat retirement fund by age 65.

My diagnosis would be quite different: “Holy Shit, Joe! What the hell have you been blowing all your money on?! You should have had a higher net worth than that many years ago, given your career!!”

Very Rough Guideline: Take the total money you’ve earned after taxes in your lifetime (suppose that for Joe it happens to be $1,243,100). If you don’t have at least 40% of it still around to show for it today, you are spending way too much.

Bonus: Suppose his nearly-new BMW can still be sold on Craigslist for $33,000. Although he has already lost $28,300 in depreciation on this horrible money pit, he could end the bleeding immediately by selling the car and taking the $33k plus $10k of his own money to pay off the $43,000 note. This would increase his net worth by $33k and set him on a much more prosperous path for the future.


This was Joe’s problem above. The key is to understand where your money is going, and for most of us that means tracking your spending. I calculate it like this:

Everything that flows out of your wallet, bank account, credit cards,  or automatic payroll deductions for things like insurance.

Finer Points:
I include property taxes and sales tax, but do not count income tax or other payroll taxes.
I include all loan interest and fees, but do not count the principal portion of loan payments.

Why? Because I’m very interested in financial independence: that point when your passive non-work income is enough to pay for a hypothetical retired life of your choosing. Right now, Joe might be earning $250k and paying over $60,000 in income taxes. In retirement, he will probably be in a lower tax bracket. Plus income might come from dividends, long-term capital gains, or rent checks from investment properties he owns. He might even live in an area with a different tax rate.

You need to deeply understanding your spending needs and wants in order to know if you can afford to retire. Instead of taking random guesses at the factors above, I prefer to think of everything in terms of after-tax dollars. Take-home income instead of gross income.

So if we sort out what is surely a twisted ball of credit card,  EFT and ATM transactions, Joe’s monthly spending might look something like this:

Joe’s Spending

Interest portion of his $2500 mortgage payment: ($2000)
Interest on credit card and student loans: $480
Car Payment: $539
Employee contribution for health insurance: $150
Full collision+comprehensive car insurance: $200
Car Registration/licensing fees: $200
Gasoline: $200
Unnecessary checkups at BMW Dealer: $150
Condo fees: $450
Property Taxes: $500
Utilities: $200
Travel: $800 
Country Club Membership: $200
Groceries: $400
Dining out: $1000
Wine and Scotch collection: $400
Clothes, Suits, and Gentlemanly Accessories: $600
Haircuts and Massages: $200
House cleaner: $400
Dry Cleaning: $150
Cell Phone: $150
Cable TV/Internet: $150
Miscellaneous Shopping, Gifts, Etc: $500

Total spending: $8919 per month

So how can a busy person track all of these transactions and categorize them well? You have two choices:

  • Manually save all receipts and enter them into a spreadsheet or piece of budgeting software every night, or
  • Do all your spending on a credit card and let some financial software like Mint, YNAB, or Personal Capital grab all your transactions and sort them out (this is what I prefer).

In either case, you’ll probably spend at least some cash which you pull out of ATMs. You will see this in your automated spending report as well – I suggest assigning your cash spending to a category called “the decadent throwing around of unnecessary $20 bills.”

Take-home pay

This boils down to the amount of your paycheck that you eventually get to spend yourself. So let’s look over Joe’s shoulder as he opens a biweekly paycheck:

Gross Pay: $8620

401(k) plan deduction: $692
Employer 401(k) Match: $300
Automatic deduction he has set up to pay towards student loans: $1000
Professional Fees/Insurance: $200
Federal Tax: $1724
State Tax: $689

Net pay to his bank account: (8620-692-1000-200-1724-689) = $4315
Since there are 2.16 pay periods in the average month (52 / 24) you would scale this up to see that he gets an average of $9349 per month showing up in the bank.

But this is where many people get confused, because this paycheck he takes home is not really his take-home pay. You need to add back in the money that he is actually using – including to pay off loans –  or will get to use – including all retirement and savings account deposits.

The MMM Take Home Pay calculation would thus be:

Gross Pay + Employer 401(k) match – taxes and fees
= $8620 gross pay + $300 employer 401(k) match – $1724 federal tax – $689 state tax -$200 professional fees
= $6407 biweekly or $13,839 per month

If this sounds like a shitload of money, that’s because it is. Anyone making $250k gross pay should be rolling in it and saving the vast majority, therefore able to retire within just a few years. If you get your savings rate right.

 Savings Rate

Now that we’ve done all the hard work, we get to hit the gas pedal and show off a little, since we can make some bold forecasts.

The savings rate is simply the percentage of your take home pay that you’re not spending.

(Take home pay – spending) / (take home pay) , then multiply by 100 to get a percentage

For Joe, it would look like this:

($13,839 – $8919) / ($13,839)    x    100

= 35.5%

Hey, Joe is still saving a third of his income, even with the most outrageous spending list that I could invent for a single guy. It’s not completely suicidal, but he is still squandering an opportunity that only a tiny percentage of humans have ever been offered: the opportunity to become financially free while he’s still young.

To steal a few data points from the most popular article in this blog’s history: The Shockingly Simple Math Behind Early Retirement:  Joe’s 35% savings rate means he is on track to retire in about 25 years. He is already 33, so this means he is sentencing himself to be locked into that office until age 58.

This may seem “early” by current American standards, but if the reports I get about high-octane Washington DC law careers are accurate, that shit can get old in a hurry. It is far wiser to earn your freedom while you are still fired up about working.

From this point, it can get far worse or far better. Joe could get married, have multiple children, and expand the level of spending (larger house, more vehicles,  private schools, etc.) to consume even more of his income.

  • If he adds just $3000 to this monthly budget, he drops to a tragic 15% savings rate and is set for a 43 year working career
  • On the other hand, if he trims down the excess and goes to a still-insane $5000 monthly spending level, he’ll be saving about 65% of his income, which means he will be set for life less than 10 years from now.
  • If he can streamline life to just a slightly less ridiculous level than that, let’s say to my own level of spending, he will be retired well before 40.

So there you have it: The easy way to calculate spending and savings rates, and your net worth.

Although I illustrated it here with an outrageous but very common example of high income and high spending, the principles work just as well, and are even more important if you are living on an average income. In the US, it is quite possible to live well on under $7000 per person per year, and even gradually become wealthy on a below-average income.

But the first step is to understand how all these dollars fit together. How are YOU doing?


Bonus: For those who love to calculate, my friend and fellow early retiree Darrow Kirkpatrick maintains a really thorough roundup of the best retirement calculators on his blog here: http://www.caniretireyet.com/the-best-retirement-calculators/

  • m January 26, 2015, 6:32 pm

    40 years old. married, with working wife. 3 kids. living on outskirts of Auckland NZ (very high house prices)… Don’t really have any idea how i’m going financially… (not good at things like this).

    house: 900k
    mortgage: 25k
    retirement account: 17k
    other debts: 8k
    Net worth (incl. house): 885k
    Savings / investments: zero

    net income (incl. wife): 11750 per month
    savings: 5000 per month – currently all going towards mortgage @ 6.65%p.a.
    savings rate: 42%

    Seems like i should be saving more. It doesn’t feel like we spend much (seems like we’re always counting pennies), however the figures above ($6750 spending per month) suggests otherwise…

    • Lynne January 27, 2015, 7:41 pm

      If you could cut your total spending to $35K/yr, you could actually sell the house and retire already (maybe to somewhere with a lower cost of living). You’re currently spending $81K/yr, which seems awfully high, especially as it’s not even including housing. I know NZ is more expensive than some places, but not *that* much more – pretty sure you could find some low-hanging fruit to cut out of your spending habits without too much difficulty.

      [Edited to add – the $35K would have to cover housing costs as well as the rest of your spending, so it would be a pretty big cut to your current spending. I still think it’s doable, but you may prefer to work longer and save more.]

      • m January 28, 2015, 5:04 pm

        Hmm, now that you put my spending figure down plainly (81K/year) I have to admit that does sound quite excessive. I only have a vague idea of where a lot of this money goes – so i guess i should really be doing some sort of proper budget.

        I think a lot of the expense is due to us living on a lifestyle block out in the country. Whist it is modest, there are various costs associated – 2 cars (no public transport) and lots of fuel (about $200pw). animal costs, various farm repairs, tractor, etc… Insurance also seems to be a large expense for us.

        That said – there is almost certainly a significant amount of fat in our spending which i need to identify :-(

        The big thing here is whether we give up our country living lifestyle and move to the city. that would certainly cut costs for us! I don’t think i’m ready to do that yet… Is is worth years on my FIRE date? For me i think yes it is…

        • Lynne January 28, 2015, 5:35 pm

          Well, I think the important thing is to make conscious, intentional decisions about your life (knowing where your money is going is part of that, so you do need to start tracking that more closely). But if staying in your current location is worth it to you, after examining your options and knowing what trade-offs you’re making, then it’s worth it.

          Congratulations on almost having the mortgage paid off, by the way. That will free up a lot of cash flow for investing in index funds. :)

    • JB January 27, 2015, 7:45 pm

      How can you have zero savings with 11K coming in each month? You should be saving money and stop paying down on the house, even though you are almost done. You are house rich, cash poor.

      • m January 28, 2015, 4:50 pm

        I know that there is lots of discussion on this website about paying off mortgage vs saving/investing. Our current mortgage rate is 6.65% – so paying off mortgage is equivaent to investing with a pre-tax return of about 8%, however paying the mortgage is completely ‘risk-free’.

        Only a few more months to go (yay).

  • CAtoTX January 26, 2015, 7:06 pm

    Age: 50
    Net Worth: $850,000
    Net Income: about $55K last year (AGI less taxes)
    Net spending :33K last year (not including child’s college tuition & expenses of $10,000)

    I’ve got 3 years to go and then no more college expenses. One more year after that and I plan to retire (sell house in CA, move to TX and live in paid-for smaller house, work part-time for fun). I’m working on getting expenses below 30K/year.

  • IowaGuy January 26, 2015, 8:04 pm

    I like the simplicity of the calculation. 73% savings rate! WHam-O

  • Itscoldinhere January 26, 2015, 8:19 pm

    Has Mr. Stash ever considered adding a second motto to the website to help clear up all the complaining of “average people can’t do this” emphasizing the most someone needs to spend to live an awesome life? “Live like a king for $25k a year.” “Buying freedom on an average or above salary”. I’m sure someone can think of a better one.

  • Becky January 26, 2015, 8:22 pm

    I’ve been busy reading your entire blog from the beginning, so this is my first time commenting :)

    Our numbers:
    Married couple, 37 and 35 with two kids, ages 2 and 4.

    Net Worth:
    House $140,000 + Retirement Accounts $254,000 = $394,000
    No debt.

    Take home pay $4380/mo
    Expenses $3564/mo
    Savings rate: 18%

    As a single income family (with myself as the primary shopper having the most control over spending), I’m working on getting these expenses under control. It’s pretty sad that our savings rate is only at 18% when we don’t even have a mortgage or car payments!!!!

    • Vawt January 27, 2015, 9:21 am

      Becky- congrats on having the house paid off already! Like you said, an 18% savings rate with no mortgage is pretty low if you are looking to retire early. I have 2 kids (2.5 and 1), so I know where a lot of your money goes!

      Read through some of the case studies on the MMM forums to look for ideas on saving. You are doing pretty good, but could probably double your savings rate without too much change. Good luck!

  • ScottC January 26, 2015, 9:01 pm

    Where does Social Security and Medicare fit into your take home pay calculations?

    I’m just starting out at this and working on knocking down debt. It’s not easy with a single income , my wife is a SAHM for our three kids, but her eyes have been opened to frugality and I’m looking for a job closer to home so we can go to a single vehicle.
    My rough estimate of our FI expenses is under $2400, so even making $55k, FI is attainable.

    • JB January 27, 2015, 7:40 pm

      I don’t consider SS in my long term portfolio, but will be a bonus cash inflow if we go a few years without working and before we can start taking other withdrawls before 70.5, although you don’t have to wait until you are 70 to take money out of an IRA if you need the money.

  • HappinessSavouredHot January 26, 2015, 9:41 pm

    Important topic. More people need to look closely at their money. MINDFULNESS will save our bank accounts! I know someone who has always made a superb salary but is always broke. He envies people who make way less, but who only spend money they actually have (and not all of it). It’s easy if you try! :-)

  • Dave January 26, 2015, 9:50 pm

    I had been wondering how to convert a pension into net worth. I have a small military pension that pays about $1,550/month after tax, or about $18,600/year. To use the 4% rule would give the pension an asset value of $465,000. But that doesn’t make sense because when I die, the asset disappears. A couple of Canadian accountants use a different formula for pensions. They suggest to divide the income by 6.67% instead of 4%. So my pension would then have an asset value of 18,600/0.067 = $277,612. Not bad. And since I only spend a bit less than $2,000/month, and already have more than $150,000 invested, I guess I’m finally at the point of financial independence. I admit though that it took a while to simplify my life and reduce my expenditures, but I’m happier than ever. I’m still working, but now with a non-profit that I really want to see succeed. And I’ve learned to become friends with Canadian winter, so I’ve cut back on my out-of-country travel.

    • Mr. Money Mustache January 27, 2015, 7:19 am

      Hi Dave.. In your situation, I’d count it as being worth the full $465k – as long as there is no chance of the military shafting its pensionees. It is just as valuable (or more) as a basket of index funds generating passive income for you. Unless you consider leaving a large estate to kids to be a high priority.

      • Ms Money Penny January 27, 2015, 7:55 am

        How would you assess the viability of a pension fund? Would you go by the official published evaluations, or see if it is backed up by an employer that simply cannot go bankrupt (like the military in this case)?

        We have pensions with the USS, the private pension fund for employees of all UK Universities. The USS claims it is underfunded according to the requirements of the UK pension regulator, and has recently pushed through drastic changes to its pension plans (no more final salary, reduced contribution rate, move onto defined contribution funds for higher (>50k) earners).

        Mr MP is 3 years away from pension, I 7 years. We are concerned about the viability of the pension fund, but it is a little late to start diverting investments elsewhere. Would you consider this a case of safety being an expensive illusion, or legitimate concern?

        • JN2 February 1, 2015, 10:06 am

          Hi MsMP, I am also in USS. The final salary component will continue until April 2016. After that it will be career averaged, so only slightly less than the FS scheme in your cases. My advice? You’re so rich: don’t worry, be happy :)

          • Ms Money Penny February 2, 2015, 9:40 am

            Hi JN2 — now, that’s the kind of reply/ suggestion I like to read (and would love to be true!) Many thanks. If you feel like starting a UK-focus thread on the forum here, count me in.

    • Jess February 2, 2015, 8:57 am

      You should just leave it out of the calculation all together. The real value of it is in your annual spend. So figure out what your annual spend is. Subtract the 18.6k and then use the 4% rule based on the additional savings needed. IE you spend 30k annually … then you need 25x 11.4k or 285k to retire. as long as you’re drawing the pension the whole time. and assuming the pension payout incresases with Inflation.

  • Expensive CA January 27, 2015, 12:09 am

    Not clear if we are mustachian or n0t.

    * Age: both 34, with 3 year old
    * Net worth: $2 million (all earned ourselves)
    – $2.1 million house, $1.6 million mortgage
    – $600k investments
    – $800k retirement
    * Pre-tax income – about $500k last year
    * Expenses – about $200k, including mortgage interest

    On the mustachian side – we haven’t been making this much money for very long (grad school and starting a company, respectively). Our cumulative lifetime pretax earnings are about $3 million. So, given taxes, our current net worth is probably between 80% and 100% of our after-tax lifetime earnings. Before we had the baby, we did not even have a place – we just stayed with family since we travelled all the time for work. I still drive my 13 year old Civic and my wife has a car through work. Of our $200k spending, $50k of it is for an amazing nanny, given our full time jobs.

    On the fancy side, who really needs a $2.1 million house, which will be close to $3 million after the renovation? The rationale here is that my wife’s family lives in an extraordinarily expensive location, and it is important for us to be close. Our lot is actually less than half the size of a typical US lot. And, we got a “good deal” at $2.1 million because it was a real fixer, so if we sold it we’d probably make money. We love our neighborhood for the mustachian amenities (walking to everything, parks, beaches, neighborliness, etc.) Nevertheless… that’s a ton of money for a house, and we could pay a lot less if we were willing to bike rather than walk to stuff, or if we got an apartment rather than a single family.

    So, are we being absurd, or is it a reasonable expense given the income we have and that we enjoy our jobs?

    • Mr. Money Mustache January 27, 2015, 7:17 am

      With that type of income, you can afford to be inefficient – although your house is still over 4x your gross income which I would consider a bit of an overreach.

      A few things to consider, just theoretically
      – in pricey areas, renting is usually a better deal than owning
      – there is an unusually big incentive to downsize if you choose to take it
      – you can always cash out and retire in style anywhere else in the country/world, so use that to your advantage
      – houses in that price range often get hit unusually hard in recessions economic crises, so make sure you don’t get caught wanting to sell it while one is ongoing. It has been 8 years since the last one in the US and we are in a huge boom right now, so the clock is ticking at this point.

      Either way, keep saving so that you can be completely covered before you get tired of those jobs :-)

      • m January 27, 2015, 3:24 pm

        MMM says ‘house is still over 4x your gross income which i would consider a bit of an overreach’.

        Try living in Auckland, NZ! The median house price is 8x the median family income:


      • Expensive CA January 28, 2015, 11:08 pm

        Thanks so much for the reply! I am pleasantly surprised that you let us off more lightly than I expected :) Agreed on focusing on saving to pay down that mortgage and/or buy a comparable stash of dividend stocks quickly!

        One financial silver linings to high house cost is that it can help bridge the gap of different levels of mustashianism between spouses:
        (1) My wife now agrees with me that buying a beach house would be silly.
        (2) Paying down a mortgage on her dream house feels more fun to my wife than just pouring the money into index funds.

  • Margaret January 27, 2015, 5:01 am

    ” He has $90,000 left on his Harvard student loans, which he plans to get serious about soon and pay off over the next 10 years.” This is funny to me today, but it wasn’t until I started reading this blog a couple of years back that I felt the same way. I had student loans that I kept around like a pet dog. Luckily, I was enlightened and they are all GONE! Thanks MMM.

  • Chris January 27, 2015, 6:20 am

    Very great. I’d never thought to use total gross (with insurance and all that included). I use my net take home with 401k added back in. As long as you stick to one way to calculate it, you can really figure out if you’re improving or not.

  • Elle 8 January 27, 2015, 6:48 am

    “Once the total value of all your investments reaches 25-30 times your annual spending, paid work is now entirely at your discretion. For life.”

    How do you calculate this if your annual spending will change over time. For example, if I retire at 55, I’ll still have the mortgage and need 50K per year. Once the mortgage is paid off at age 61, I’ll only need 40K per year. Then, at 65 I’ll be eligible for MediCare, so I’ll only need 32K per year (estimate, as I have no idea how ACA will play out). Then, when I start collecting SS at age 70 (estimate 31K) I’ll only need 1K per year. Of course I’ll want a cushion, those are bare bones numbers.

    Should I calculate an average? Should I not be counting on SS at all?

    • Mr. Money Mustache January 27, 2015, 7:11 am

      Hi Elle,

      Your situation is different because it’s more of a traditional retirement age – so you don’t have to survive for a long time on investment income. If I were in a similar situation I might do it like this:

      At age 55, you’ll need:
      – About 60k to pay off the mortgage
      – plus 40k a year from age 61 to 65 ($160k)
      – plus 32k a year from 65 to 70 ($120k)

      Total is $360k. Then you get the 15 years of investment returns (which gradually shrink as you use up that principal) as a large cushion to reinvest as you go.

      Note that it’s much smaller than the $40k x 25 ($1M) that a 30-year-old might need to fund a long retirement using a 4% withdrawal rate. This is because I would definitely count on Social Security for your generation. For me, it’s more likely to be scaled back especially for high-income people.

      Because we are talking about such a short time period (15 years), a simple total of your spending is more important than annual portfolio income. For example, if I wanted to retire for only 1 year before a pension started, I’d need exactly $25,000 since that is my annual spending.

      • Elle 8 January 27, 2015, 8:11 am

        Thanks MMM. That simplifies it for me. However, I think we’re missing the non-mortgage expenses for age 55-60. This will add another 240K (40K x 6 yrs). I’m on track to do this! I’d always been frugal but before finding your blog I never thought of retiring before 65. You’ve potentially given me back 10 years of my life!

        • Elizabeth January 28, 2015, 7:29 pm

          “You’ve potentially given me back 10 years of my life!”
          This is why I read MMM – insights and encouragement. Go, Elle!

  • Stan January 27, 2015, 7:17 am

    A little off topic, but I noticed that creditkarma now has 2 credit scores and full credit reports (transunion and equifax)? Now instead of paying a yearly fee to see them it’s available every day for free.

  • danno January 27, 2015, 7:43 am

    I could be wrong but the way I calculate this Joe’s savings rate is approximately 50% of his take home pay of 14K per month.
    He is saving 2k per month or 24K per year in his 401K, ($700 per pay period 401K contribution plus a 300 match X 2.16 pay periods a month or approximately 2K per month or 24k per year) plus 5K per month or 60K savings per year, he is saving 84K per year.
    What is shocking to me is that if you take is current 401K balance of 77K and add his savings of 84K per year each year at a 5% return in about 20 years all he would have is 2 million.
    This is living as a bachelor.
    Appreciate the example.

  • honeydothisrick January 27, 2015, 10:54 am

    Hey MMM- I really appreciate the simple formula and breakdown of the numbers. This is a huge help for the financially inept like myself. Your past writing(s) were a refreshing bucket of ice-water to the face that put me on an aggressive path to paying off student loans by selling my truck and tightening up my monthly spending. In less than two years it looks like I’ll be getting back in the positive column in terms of net worth.

    I would say I’m in debt to you, but I’ve got higher interest suits to pay-off first!

  • Jon January 27, 2015, 11:03 am

    It would be nice if you could do this kind of layout/example…But on a more realistic income/spending habits.

  • Tina January 27, 2015, 11:55 am

    What is a good, consistent way to treat HSA deductions and HSA savings/investment accounts in these formulas? Should I pretend my income is lower by the same amount as my HSA deduction? Should I treat the HSA account balance as an asset? Thanks!

    • JB January 27, 2015, 7:29 pm

      You should treat it as part of a % of your savings. It is just a Health IRA.

  • Mike January 27, 2015, 1:06 pm

    Another thing to consider is all the spending that falls away after financial independence. I could drop my expensive own occupation disability policy and life insurance. I could drop my malpractice insurance , and work clothes and business gifts and silly business dinners and continuing education, licensing fees.

  • Sarah January 27, 2015, 2:35 pm

    Another pension-related question: I have 9% of my pay automatically deducted from every paycheck for my pension. (I have no control over this; there is no opt-out option.) By law, my employer kicks in 10%, although this will go up in the next few years until it is 20%.

    When calculating my savings rate, I will definitely add in the 9% pension deduction because I see that as a form of forced savings. Should I count the value of the employer contribution, though? On the one hand, it’s a form of compensation that ensures the viability of the pension. On the other, the employer contribution can never be cashed out; it’s a contribution to the fund overall, not to one particular employee’s account. If I leave employment and cash out my pension, I only get my own contributions plus interest.

    • JB January 27, 2015, 3:03 pm

      I have 7% of my pay taken out for our pension and I am counting the portion of the money I put in as part of my net worth, but I won’t count the portion I get from the County until I actually start to take the pension and know what the lump sum amount will be. I get 225% of what my pension contribution is. So if I have accumulated $100K, the County will contribute $225K for a total pension of $325K. I can only estimate what my portion would be, but it seems pointless to add in the extra money until I know what it is. If I end up leaving the job and get nothing, I would take the pension amount out of my net worth.

  • Bruce A. January 27, 2015, 2:45 pm

    This may seem elementary but are IRAs, 401k, and other long-term investments included in the total savings percentage? Also, If I am saving 50% of my income, is there a recommended percentage in the diversification of those savings between retirement, cash, and other investments?

    • JB January 27, 2015, 7:29 pm

      You should have 3-6 months (or more) of emergency savings and an account for buying a new car or other short term goals and then do your retirement savings in the 401K/IRAs. Money for investing is long term money. Not be used for 3-5 years or longer. All your money is included in your net worth, but you can break out short term vs long term. I don’t, but I have a large cash account and a large brokerage account so I can buy a new car for cash whenever we decide it is time to turn in the 14 year old SUV.

  • DorianYates January 27, 2015, 2:52 pm

    Wife and I are both 41.
    Income 90k (Sales Manager)
    Total investments and retirement accounts = $670k
    Paid off House Value =$300 k
    Zero debt
    Networth = $970K

    Selling one of our 2 cars. Wife is a SAHM. With 3 kids, its made life simpler and more enjoyable to have her home.
    Aiming for $900k in total investments before I call it quits. Our annual expenses are targeted at 33k once I quit work.
    Counting down the days……

  • gpisabela January 27, 2015, 2:54 pm

    Since I’m tracking my numbers for a few years, and I never calculated my savings rate, I got very excited to do it now according to this guide. And I have the big totals for 2014, yay! However, I am confused a little bit:

    1. Joe’s Spending says “include all loan interest and fees, but do not count the principal portion of loan payments” and then includes “Car Payment: $539” in the spending category. Isn’t car payment including loan principal?

    2. Joe’s Spending says “Employee contribution for health insurance: $150” but my Take Home Pay, when I look at the paycheck, excludes this category. Should I include it back in the Take Home Pay?

    3. What about capital gains/losses for the year, do I include them in the savings rate or not? RESP grants? Child benefit?

    • JB January 27, 2015, 3:05 pm

      If you have consistent capital gains and dividends, I would count the money into cash flow if you are taking the cash. If you are just reinvesting the dividends, it would just get added into the value of your retirement accounts.

  • Jennifer Roberts January 27, 2015, 3:11 pm

    At 33, my husband and I have a quarter of “Joe’s” income (and that’s only recently, after a promotion), but our net worth is about the same. Not that our net worth is anything to brag about, but, wow! If we had $250,000 to work with each year…oh, man. It’s unfortunate when people with high incomes can’t see the forest for the trees.

    • jb January 31, 2015, 2:44 pm

      expenses rise to meet in ome. many in the 300k income spend the money on housing and taxes and education

  • Cadence January 27, 2015, 4:25 pm

    I have been reading this blog for awhile now (a year maybe?) and have yet to be able to convince my hubby to do so. That said, I do most of the spending and all of the bill paying, etc. I also have NO clue what I’m doing other than paying as much as I can on debt each month. For example, with each job I’ve left that I had money in a 401K, I never followed up about it….one of the many things on my to-do list.
    *Who is a professional person who can help us get our shit together?* Financial planners always seem to be for people who have plenty of money…Thought about debt consolidation stuff but I’m not very trusting of that and also feel responsible to actually pay off what we owe and not get some kind of break because we were stupid before.
    We just moved to CO from Boston (in large part due to cost of living, but also the beauty/mountains) and want to buy a house this year if possible so we are very motivated to pay off more debts/save more $$.
    I appreciate any advice!
    Cadence :)

    • JB January 27, 2015, 7:25 pm

      Call Vanguard or Fidelity and have them roll all your old 401Ks to one account. Then just read basic investing advice on the Vanguard page. It isn’t rocket science.

  • nath January 27, 2015, 4:53 pm

    Thanks MMM This article really made me laugh.

    I work in the finance industry and I see people like this all the time. On the outside they look and sound successful, they are even cocky about it, but they are stuck in the rat race and unless they make some serious lifestyle changes, are not going to be financially independent anytime soon.

    You are right to count principle repayments as part of your stash building. As it is effectively “forced savings”. Paying off debt and putting you in a better financial situation with every payment.

    just in response to this section:
    “Suppose his nearly-new BMW can still be sold on Craigslist for $33,000. Although he has already lost $28,300 in depreciation on this horrible money pit, he could end the bleeding immediately by selling the car and taking the $33k plus $10k of his own money to pay off the $43,000 note. This would increase his net worth by $33k and set him on a much more prosperous path for the future.”

    Selling the car wont actually increase his net worth, as the loan still needs to be re-paid. effectively he loses $10k cash savings to pay out the loan, but his net worth remains the same as the car already was worth minus $10k..
    The benefit is to cash flow with no payments.
    If you go out and buy a new car for $20,000 and take a $20,000 loan your net worth has not changed at all. Until the car starts depreciating and your repayments have not kept pace with this.

    great post this one MMM

    • deepseafalcon January 30, 2015, 2:58 pm

      Hi Nath
      you are saying “Selling the car wont actually increase his net worth, as the loan still needs to be re-paid. effectively he loses $10k cash savings to pay out the loan, but his net worth remains the same as the car already was worth minus $10k..
      The benefit is to cash flow with no payments.”

      I think what you are missing here is that the value of the car depreciates (in almost all cases) faster than the loan is being repaid, especially if you have also interest to pay.

      So while I agree with you that MMM’s method of completely discounting the residual value of the car in the net worth calculation is not entirely accurate, it gives better guidance how to make sound spending decisions in order to support a growing net worth. Not buying an expensive car is certainly in the right direction.

      However, I do find your second statement dangerous advise, especially considering your profession: “If you go out and buy a new car for $20,000 and take a $20,000 loan your net worth has not changed at all. Until the car starts depreciating and your repayments have not kept pace with this.”

      This implies that there could be a real-world situation where a car depreciates only a while after it was bought, and more slowly than the payments incl. interest.

      Assuming >0% interest, this is impossible as (regular) cars never appreciate in value, but the interest payments directly reduce the possible net worth. The only (for most people hypothetical and also not risk-free) exception would be some sort of classic or exotic car that could appreciate. But this is, imho, really a special case not applicable to this discussion.

      Moreover, one should consider that almost all cars IMMEDIATELY depreciate once they are driven off the lot, often by 10-20%. And then there is taxes & fees which cannot be recouped either but must be financed too, so another immediate dent into the net worth.

      ==> I suggest you reconsider what advise you (presumably) give in good conscience to your clients that might be financially less skilled, and trust a financial professional.

      Btw: I personally do not fully agree with MMM’s advise to immediately go and sell off any car that’s newer than 5 years and worth more than a few thou.
      I believe that owning a car can very much be a pleasure in life worth the expense. Its a personal choice, just like any other spending. But one should have a realistic view of the impact on one’s spending, and ability of wealth accumulation.

      So my advise usually is to only buy a car one can afford paying cash – and to do so! This usually limits the risk of “buying too expensive” very much, and the immediately visible negative cash flow has a profound psychological effect as well, helping to contemplate if it’s worth it and wether there are better options.
      That’s what I did my whole life (I owned a total of 14 cars over the years, none was financed), and would recommend to anyone.

      • Nath February 2, 2015, 4:45 am

        Hi thanks for your reply.

        There is no “dangerous” advice here as I am not advising anybody just giving my opinion. I am not a financial advisor either.

        Cars depreciate. My comment to MMM merely refers to the fact that selling the car does not change the net worth. It only affects future cash flow! Simple

        Likewise if a new debt is created , say you or me go and use 100% finance to buy a new car or any other “asset” with 100% finance,. There is no change in net worth at all.

        Of course depreciating assets like cars erode your net worth, so hopefully you have other real assets working for you.

  • Joe January 27, 2015, 5:20 pm

    I’m also a Joe, but that’s about as close as I get to the guy in this example! Currently making about 30k (between 2 low-paying jobs). I’m crazy frugal though, so I have about a 40% savings rate. I know it’s all a percentage game, but I’m desperate to increase my income to boost that savings rate to more like 75%!

  • Anne January 27, 2015, 7:14 pm

    “Once the total value of all your investments reaches 25-30 times your annual spending, paid work is now entirely at your discretion.”

    Investments: $420k
    Debt: $0
    Savings rate: 86%
    Estimated FIRE Spending: $25k/yr
    25-30 times spending = $625k-$750k investments needed

    For someone who is debt-free, I don’t really see the connection between net worth and financial independence. Investments (stash) and spending seem like the important part (for me anyway).

  • Genevieve Hawkins January 27, 2015, 7:48 pm

    My savings rate sucks…then again at $15,000 for a family of four…there’s more room to cut than you’d think. We’re living at my mom’s house rent free, for example. I’ve been really happy with CreditKarma because they let me find out my credit score for free really, and didn’t just give me credit card offers that were thinly disguised as “Pay us $300 and we’ll give you a $250 line of credit.” So I have no debt…just want to buy a plot of land somewhere warm, for as cheap as is possible (less real estate taxes that way) so we can grow our own food and my husband can build a house. I don’t care if I make $0, $100, $1000, or $100,000 as long as our basic needs are taken care of, it’s all just a number. I sometimes look at these hypothetical examples of people making awesome amounts of money each year and am really fascinated. Are they happier? Did they give up the important things to make it? Or do I just undervalue myself?

  • Jonathan Gomez January 27, 2015, 8:54 pm

    Hi all. I need some Mustachian advice. I’m 22 going on 23 years old and I wanted to know if I was on the right track to early retirement. I currently have an asset allocation of 95% stock and 5% bonds. I’m invested in the domestic market. I’ve invested in the VTI ETF and BND ETF through Vanguard (since I haven’t started my career yet and can’t afford to invest in the mutual funds.) Is this as appropriate asset allocation? I didn’t want to go 100% stock because when the value of the stocks dropped I would have no bonds to sell and invest into the stock market for more gains.

    Also, I haven’t been receiving notifications through email when somebody replies to my messages. I really want to read the comments and learn more and sometimes it’s a pain looking through all the comments to find the one I posted. Maybe this is something you can look into MMM.

    • Tad January 28, 2015, 11:23 pm

      My thoughts:
      (1) I would include at least some international exposure. I’m heavily international, especially emerging markets (roughly 50% US, 25% EM, 25% developed international). That has sucked for the last few years as the US has roared ahead of international, but that’s probably all the more reason to get international exposure now – over time performance tends to balance out, so international is probably “due” for a period of out-performance within the next few years.
      (2) I see very little upside to having much bond exposure. With yields at all time lows, prices have nowhere to go but down. I think the benefit you get from rebalancing on 5% of your portfolio is trivial, and you’re probably better off just dumping it all in equities. If you want more balance, putting some money in REITs rather than bonds can give you more upside.
      (3) The above advice does not apply to money you might need in the next 5 years. On short time horizons, both bonds and stocks are risky. Even 10 years you could lose money, although if you count dividends, the risk is probably pretty low.

    • JB January 29, 2015, 9:40 am

      To me, being that young, I would go 0% bonds until you hit your 40’s.

      • Jonathan Gomez January 29, 2015, 9:52 am

        If I go 100% stock aren’t I risking the possibility that the stocks will be low when I’m in my 30’s which could stop me from pulling out the money so I don’t realize any loses therefore forcing me to hold off early retirement?

        • JB January 29, 2015, 12:04 pm

          What is the difference between 95% and 100%? Bond values will decline with rising interest rates. You will always have an issue of cashing out stocks in a down market at some point in your life. You will probably go through 4-5 down cycles in the market. Have a large cash reserve so you won’t have to sell in down times, or just suck it up and sell and take capital losses.

          • Jonathan Gomez January 29, 2015, 12:53 pm

            When the market is down, wouldn’t the bonds tend to continue to grow? Since they are generally considered safer. Wouldn’t they give me extra capital in addition to my monthly investments that I can use to profit even more in the future, since I could sell the better performing bonds during that time to reinvest in the lower performing stocks? Is it possible that the small investment in the bonds could act as the large cash reserve to some degree? I was under the impression that typically when stocks are doing bad bonds are doing good, but I could be wrong since I’m still so new to this.

            • JB January 29, 2015, 2:01 pm

              Bonds are not 100% safe. there is credit risk and interest rate risk. Bond values are dependent on interest rates. Long term bonds are more susceptible to interest rate risk. For every 1% interest rates go up, bond values go down. So if you have a bond worth 100K at 3%, you will always get your 3% interest, but if interest rates go up 1%, your bond would approx be worth $93K. So if we are in a rising interest rate environment, which we will be soon, if you had to sell the bond, you would lose money. Shorter terms bonds aren’t as volatile, but the same concept applies. with a bond fund there are hundreds of bonds in the mutual fund, but they are all subject to interst rates. You need to keep emergency fund money in a money market account. In 5 years, it could be paying 5% and you can get bonds at 8%. Your emergency fund is for short term goals and possible cash flow in a down market. Anything in investments should be long term for more than 10 years. Build up a healthy emergency fund and then do your long term investing or do both, but know that you would touch the Money market savings first. You also need spare cash to buy mutual funds on large dips in the market. This is where a lot of wealth is made by those that know the market will go back up eventually and it is like buying a TV on sale for 10% off. If you kept buying funds during 2008-2009, you have a 165% gain on most of that money, depending what you bought.
              You should also consider adding in international funds to your portfolio to the tune of 15%-20%. So you could have 5% cash, 15% international and 80% equities. Later, you can work bonds into the portfolio, but in my opinion, you are too young to own any bonds. Someone smarter than me might correct me, but up until last year, I had like 2% bonds and that was just a function of some mutual funds held some bonds.

            • JB January 29, 2015, 2:02 pm

              Go and google Ric Edelman and listen to past podcasts. It will only take 8-12 until you understand his message on how to allocate a portfolio with ETFs.

    • Jonathan Gomez January 29, 2015, 10:03 am

      Majority of the interest made that we could live off of in our 30’s comes from the assets appreciating in value, right? I Thought that the income did not mostly come from the dividends.

      • Tad January 29, 2015, 4:39 pm

        I think you’d be a lot safer planning to live off the dividends. If 4% is a safe rule in total, and you can safely get 3% from dividend stocks, then at least 75% should come from dividends, and if you have a bit of a buffer, you could push that up to 100%. That way you are protected from most volatility, as American companies are extremely reluctant to cut dividends.

        • Jonathan Gomez January 29, 2015, 5:50 pm

          I’m still a little skeptical and need to know some of the math behind it. Let’s say I had 650k and wanted to live off of 4% of that – that’s 26k. If I go to the Vanguard total Stock market index fund investor shares and then I went to the distributions tab and found the amount of distribution given out for the last several quarters I can see that approximately 22 cents are given out 4 times per year in addition to the individual shares appreciating in value. When I go to the Vanguard total bond market index fund investor shares I see that approximately 2 cents are given out per share 12 times per year. If I took an asset allocation, such as 90 stock, 10 bond, and took the 650k and multiplied it by 0.9, I get the amount invested in the domestic stock index fund, which is 586k. Furthermore, if I take that 586k and divide it by the value of the share at the last distribution payout I get the number of shares invested, then if I multiply that by the average 22 cents per share distribution I get about 2487 as my dividend payout for that quarter. If I multiply that payout by 4, just for an estimate, I can expect roughly 9948 as my distribution amount earned for 1 full year. Using the same method for the bonds I get about 65k invested, equivalent to about 5980 bond index shares, leading me to 120 made in one months dividend, and finally 1435 in total distribution for the year. If I add the distribution for the year for stocks and bonds I get roughly 11383, which is a little less than 50% of the amount I need for that years expenses. The only way I can think of covering my expenses would be to actually sell some shares if I wanted to maintain the same asset allocation. Even when I looked at bonds at 40% I still came up short. Could you lay out the math like MMM would? It paints a picture in my head and allows me to determine the accuracy of the advice since it simply isn’t adding up to me at the moment. I feel like my math is correct with variations being a small percentage enough that it wouldn’t change the result I came up with where I could not live off of the dividends alone. Thanks in advance for the help.

          • Amanda M. January 29, 2015, 6:47 pm

            Your math is good. If you are invested in something that has a 2% dividend (a pretty common dividend for funds), and you didn’t want to cash out any of your holding, you would only be getting your small dividend. The 4% rule assumes that you will be removing some principal, but the market will grow by 7% so that inflation will not eat your remaining principal.

            • Jonathan Gomez January 29, 2015, 7:16 pm

              I know that during the market bust in 2008 the best strategy was to buy more stocks because of their later appreciation in value. Since we have already established that I will likely have to liquidate some of the funds assets to cover expenses I was wondering what a person like me should do if a market bust like that happens again during my early retirement years. Should I try to get a job during those times to avoid liquidating the assets when the market is low? Or, would you recommend a different strategy that may stand a good chance against an economic crisis like that? Im trying to get the full strategy here so that I can set clear goals and maintain a growing nest egg properly. There are index funds for high distribution companies, but I’m not sure if they are diverse enough. I’m still doing research on those types of index funds.

            • JB January 30, 2015, 7:39 am

              Not all dividends are guaranteed and are subject to reduction or elimination. There are more stocks that don’t pay dividends, but are growth focused. Dividends aren’t the be all end all. Be diversified.

    • Amanda M. January 29, 2015, 12:28 pm

      It’s been said many times, but your original question, am I on track for retirement, has more to do with your savings rate than anything else (asset allocation is important, but if you’re currently only saving 5% it doesn’t really matter). To get a better handle on whether your on track, look at your saving rate and monthly spending. Those will be better indications of progress.

      • Jonathan Gomez January 29, 2015, 12:47 pm

        Is it better for a person to put the money they plan to live on during down times in the market in bonds or a money market account? Is there a better option than those two? I’m trying to understand how this will look years down the road. I currently don’t have some savings rate because Im in college and haven’t started a career yet, so I have no steady cash flow to invest. I plan to get a part time job until I start my career so that I can begin investing regularly.

        • JB January 30, 2015, 7:37 am

          Dude, relax. You have plenty of time. You keep 2%-4% in cash for emergencies and diversify the rest. You can be plenty diversified with less than 10 different funds. I applaud you for being aware so young in your life.

  • LeisureFreak Tommy January 27, 2015, 9:19 pm

    The math works and I was glad to see MMM reply to a comment regarding making calculation adjustments based on how long you need your investments to cover all of your retirement funding (eventual Social Security) and factoring different spending rates to cover events like home payoff during retirement.
    I Retired the first time at age 51. While living off my investments I started a second career and retired again at age 56. Savings rate during career #1 was 50% and career #2 was 95%. I’m currently on a short side hustle of interest with savings rate 95% ($7K month) ending in May. Freedom to pursue paying opportunity just increases my net worth. Being paid to experience and learn new things is a great way to live.
    Currently @ age 56.75 with home paid off and my Net worth continues to grow. Lifestyle funded using the 4% withdrawal method. Expect to start Social Security in 10 to 13 years which I use in making long term funding calculations using 75% of their projections to account for possible future Social Security solvency reductions.

  • Mrsstubble January 27, 2015, 9:23 pm

    Holy crap!! Ive been doing my calculations wrong!!
    We are just starting this journey but here’s what we have:
    Combined gross income is less than $125k/yr
    Net worth: 98k
    Savings rate 71% Whoo-hoo!!!

    Not nearly as bad as i thought. I think we will strive to double our net worth this year.

  • Wrando January 27, 2015, 11:58 pm

    By this method, I’m currently budgeting for a 49.75% savings rate. I am also currently a single renter so there is obviously room for improvement… ahem… ladies… ;)

    I have finished the last few years with a 65-75% savings rate after bonuses, but those aren’t guaranteed so I don’t budget for them. Nor does that figure reflect my normal spending as I do treat myself with those bonuses in ways that I wouldn’t necessarily on a fixed income.

  • Michelle January 28, 2015, 12:13 am

    Hi Money Mustachers! I started reading this blog more than two months ago and, after getting CRAZY EXCITED, I decided to truly go for it in 2015 and woman up and start saving some dolla billz. Can you believe that I am on track to pay $2k dollars on my credit card in January after just majorly buckling way down on eating out/shopping/mindless purchases?!

    I honestly cannot BELIEVE it. Just a few months ago, the $5k I had on my credit card felt unmanageable and hopeless to me to pay down in less than a couple of years. Now I’m just ready to ninja punch the rest of my debt in the face and move on to saving. I grew up poor and, as stupid as this sounds to me now, I had just sort of accepted as a fact that I am bad with money. Now, it’s like, ‘HELLO!!!’, that’s just a story I was telling myself. It made me a little crazy at first to not be able to eat out/go to bars/go shopping/go to Vegas on a whim, but now I am getting used to it and it sort of feels great.

    Welp, guess I was just trying to brag a little on myself and say how thankful I am to have come across this website randomly while farting around on the interwebs one night. I think I will always look back on it as a turning point in my life. Cheers!

    • HenryDavid January 30, 2015, 11:52 am

      High five to you Michelle!
      The Restofyourlife just got better thanks to your own brains.
      Using them to see inspiration and not just think “somebody could do that,” but truly act on it, I mean.

  • bobj January 28, 2015, 2:07 am

    I would like to ask MMM.. at waht point do you plan to spend all the money you saved? 50, 60, 70? How will you spend it?
    And, will you ever stop worrying about saving? I ask because my wife and I are nearing retirement and don’t want to leave my money sitting in a retirement account when we are gone.

    • John January 31, 2015, 7:27 am

      Many people are happy to leave what’s left to their children or other loved ones. I suspect MMM will leave most of the stash to charity. If neither of those choices work for you, then you just need to take a best guess at when you think you and your wife will die and set your withdrawal rate to take you to $0 on that date. Obviously that is risky, so you should probably include some insurance into your plan. Buy a deferred annuity that you believe will meet your inflation adjusted spending needs that starts paying when you are 80 or 85. Also include some long-term care insurance. Then spend down your stash with a reasonable chance you won’t end up regretting it.

  • Edward January 28, 2015, 4:45 am

    Age: 42
    Nationality: Australian
    Net Worth: $2,150,000 (House $1.45m, Retirement funds $0.3m, investments $0.4m)
    Debts: 0
    Car: 2001 Subaru
    Cycle: to work every day and whenever else possible
    Income: $12k per month after tax
    Job: specialist able to earn high income with relatively low hours (about 35 per week)
    Family: Wife who does not work but volunteers a lot, 3 kids
    Spending: $7k per month, kids seem to be a lot of this, they are very busy with sports, music, etc plus Australia is generally a high cost place to live. Always amazed at how cheap everything is when I visit the USA with work.

    So we spend about $84k per annum. By MMM rules this means we need $2.1m in investments to retire. We have $0.7m, so need another $1.4m. We save $60k pa so need another 23 years of working to get there. Yikes. We like our community too much to sell up our house and move to some backwater. At least while kids are at home. In about 10 years we would probably downsize.

    1. Our costs will go down a lot as the kids grow up and move on (we hope)
    2. My wife will start working again in about 4-5 years, she can earn about $60k pa after tax
    3. We might blow about $500k on a holiday house as this is my wife’s dream
    4. I like going to work, for the most part

    So we have a high net worth but little prospect of retirement for me in the short term. We live a rich and full life, I cant see us adopting a lower cost simpler lifestyle. I think we will keep going as is until the kids move on and then through house downsize and added wifey income the scenario may be a bit different. Anyway, just thought I would post for interest.

    • ERA January 31, 2015, 4:12 pm

      Nice net worth Edward. I also live in Australia, in a backwater :) I live in a town on the coast pop 20000,, 5 min walk to the beach, 30 min from an airport and about 40 min to a major city. A nice 4 bedroom house with a decent yard costs around $600 000. Average house price is around 500K. We used to spend around 60-70K a year but since discovering MMM it is about 40-45K. Basically if our net worth was over 2 mill I would be FI with a 3% SWR living the good life. Anyway just thought I’d throw that out there.

      • nath February 8, 2015, 11:05 pm

        Hi Edward,
        I also live in Australia in Melbourne.
        Your doing well financially but very low investment assets compared to your age and income.
        Your no debt position sounds great on paper but sounds like you should invest more and borrow for some investment properties. You can do this while keeping the title on your primary residence free and clear.
        Use some of your $400k investment stache as deposits for 2 or 3 decent properties and let the renters pay them off for you. Always use principal and interest loans , and offset accounts as this is “forced” savings and in 10 years you will be sitting pretty even without considering appreciation.
        Keep reading MMM also as the second home / holiday house is a black hole financially and you would spend the other half of your life working for it. Doesn’t sound like much fun to me…
        best of luck

  • sdp January 28, 2015, 6:59 am


    here’s one just posted on yahoo. thesefolks make about 180,000 a year, they could be done working in just a couple. instead the dude says shit like: “If he spends a little more than he saves, McManus explains that he doesn’t panic. “I’m okay with monthly swings, even large negative ones,” he says. “My ‘savings’ pot is typically no less than $7,000, providing me with plenty of buffer even if I have no other reserves. I pay more attention to my rolling average to ensure I’m on track to meet my plan by the end of the year.”

    “For all of 2014,” he continues, “we spent $324.22 more than we made………”

    unbelievable… and he is proud of it….

  • Mary January 28, 2015, 8:59 am

    I discovered MMM a little less than a year ago, and have learned a lot of common sense on this blog. I have to say, I had a “duh” moment – I never thought that decreasing my spending would allow me to have an early retirement – this idea had never entered my mind. I thought that the “normal” way to do things was to work 40 years, and retire in your 60s. Pay your bills with the money you earned, and anything left over to be spent on whatever the heart desired (with some $ going into savings account). With the average American not saving much, I thought my 8% savings in my 401(k) with the employer match of 4% was admirable savings of 12% per year. I work in Corporate America, and do not love my job. I had thought, if I can just make more money, maybe I can get out sooner to do something I love, not really correlating the importance of spending less. I loved shopping, and my husband knew the UPS driver’s first name.

    Reading this blog has given me the “aha” moment I needed in order to plan for an early escape from Corporate America. I increased my 401 (k) contribution to 15%, and am saving an additional 25% of pay in stocks and mutual funds. I am constantly looking at more ways to save on expenses (getting great ideas on this blog), and hope to increase the % saved in the future, but I am proud to have increased my savings level to 40% in less than a year. Shopping is no longer a hobby, and only reserved for items that are actually needed – with the definition of “need” tweaked. Cable was cut over a year ago, cell phone was changed to a tracfone with an annual expense of $100, cars have been paid for and are expected to stay with us for the next 10 years, and eating out has decreased to about once a month – for budget as well as health reasons.

    I’ve seen layoffs at my company, and know that no job is secure, but with my savings, I am no longer concerned if my job is outsourced. It feels good to know that I will survive with my stash that will hold me over until a new job is found, and I have the power to walk away if job conditions deteriorate. Right now, my goal is to retire at 50 – 8 years away, but it doesn’t seem as far-fetched as it once would have. I am blessed to have a frugal husband as well- in fact, he has been frugal a lot longer than me, and is amazed that we are now on the same page.

    I just wanted to give a thanks to this blog and the various contributors, as you have enlightened me, and shown me that early retirement is not just a dream – it can be a reality if you make the right choices, and resist the marketing that is constantly trying to convince you of what you “need” to buy ;)

  • Pooperman January 28, 2015, 10:21 am

    Unlike MMM, I do count my car as an asset, though for a bit of an odd reason. It was a gift to me, so any proceeds when I do eventually sell/scrap it will be money to me. I also ignore assets I don’t have direct access to, even though they are assets. These are things like my rent deposit and a coin collection (silver). When you add up everything period (including these) and compare them to the total earned money, it’s at about 40% for the lifetime savings rate. I intend to get this up over 50%. Currently, the take-home is somewhere around $50k. Spending is somewhere in the $30k-$35k range. Income will rise, spending will rise as well (but more slowly) so the 40% savings rate will end up rising above 50% and maybe even 60% before FIRE.

  • Rowan McCarthy January 28, 2015, 11:00 am

    Please could you clarify something for me? In the example it states that 33 year old Joe’s 36% savings rate consigns him to about 25 years working until financial independence (FI) and therefore he has an estimated FI age of (33+25=68). Surely this is assuming that Joe is in his first year of work? For example, could someone not have a savings rate of 36% and be in their 25th year of doing so, therefore just about to retire?

    Basically, does the savings rate indicate the total years until financial independence, or the number left to go?


    • Mr. Money Mustache January 30, 2015, 8:21 am

      Good point, Rowan – in this case the rough projection is right since Joe has almost no net worth (only equivalent to a fraction of a single year’s spending). But as you accumulate investments, you are of course getting closer to financial independence. I need to update this article to make that part clear.

  • David January 28, 2015, 1:19 pm

    It’s remarkable how simple most of the math is, yet so few people are willing to do it. Part of that may just be an unwillingness to even consider the possibility of doing without something in the immediate future, but I think a lot of it has to do with a lack of awareness. For many people, even extremely high earners like you included in your example, savings and investments aren’t even on the radar; they have exocitc vacations to not enjoy, trendy bars and restaurants to overpay at, and significant others/friends/neighbors/coworkers to impress with their spending.

    It’s not that most people couldn’t do it, or even that they make a conscious decision not to do it. They aren’t even aware of what it is that they’re ruling out by spending so haphazardly.

  • Mikael January 28, 2015, 2:19 pm

    Good article as usual. But think Step 2 is a half-truth. Of course you should pay off debt as quickly as possible. But one need not rush to invest their money.
    To quote Warren Buffett:
    – “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. ”
    – “Price is what you pay. Value is what you get. ”

    My own approach to investment is very similar to how I shop in a grocery store. I buy only healthy products I like, and I know that product prices vary greatly several times a year, and when I buy in bulk.

  • Jeff January 28, 2015, 2:56 pm

    I don’t count my wife’s numbers because we maintain separate accounts, mostly by design. She is more conservative by nature and probably has a higher SR than I do.
    Net worth: 220k
    Take-home pay: appx 100k (GS-12/4, ANG O-4, Realtor on the side, small rental profit)
    2015 scheduled savings: 44k (TSP, IRA, real estate partnership contributions, principal paid)
    2015 expected add’l investments: $20-30k in solar and other energy improvements
    Realistically, a 74% SR is dubious at my discipline level, but one can always strive. 74k invested is more likely if I catch a few extra sales and push the TH over 110k. (I know, I know, spoiled asshole, facepunch, etc).
    Anywho: many thanks to MMM for helping me get to this level of savings. I was staggeringly lazy about preparing for the future in past years, and while I started getting serious 3-4 years ago, the last year has been a period of dramatic improvement both in mindset and actual results.
    Near-term goal: build real estate sales and rental income up so I can quit my federal civilian job and still have family income near 100k while self-employed (aka semi-FIREd); keep cutting costs.
    Wife makes 40k and ANG pays around 20k, so one good sale a month would do it.
    Long-term goals: primary focus on nonprofit work and significantly more annual family time (months, not days) within 4 years (age 40). Full FI within a few years.

  • GDP January 29, 2015, 5:38 am

    I am pretty much exactly like Joe, however lacking that sort of large income. Then again I would wager most American are just like Joe too. Its funny how we have all this wealth in the nation, but spend it faster than most others could ever dream of. I really wish I had started earlier.

  • JB January 29, 2015, 9:47 am

    The axiom of expenses rise to meet income is true for many. Bigger salary, better car, bigger house, better gym membership etc…at some point you have to accept what you are willing to spend and start saving the raises/bonuses and challenge yourself to save more money. Everytime we get raises, I bump up the savings to the amount of the raise. I haven’t done a year by year comparison, but we spend about $85K last year, with 20K being charity donations, so we spent about $60K on a $400K income. That is spending 15% of our gross. 30% of our net, but we are saving 45% of our gross. If I save another $10K a year, it isn’t going to significantly increase our net worth. When we call it quits, we should plenty of money. I can cut back when I am on a fixed income.

  • Mr. Captain Cash January 29, 2015, 10:13 am

    Interesting post MMM. I find myself exactly like Joe except on the extreme opposite end of the spectrum. I am maintaining a savings rate of 80% and above. I will be able to escape the rate race within the next four years and definitely before my 28th birthday.

  • Amanda M. January 29, 2015, 12:41 pm

    My current forced savings rate is 49.9% (including 401k, HSA, and automatic Vanguard withdrawals after each paycheck). If you add up my manual investments last year from the surplus, I’m closer to 65%, but I’m figuring in the 50% in my calculations until it goes up again this year.

    I’m currently considering a housing move that would take me from a small apartment alone to sharing a house with one other person. This move would save me $1000 a month (!!!), and get me 5 miles closer to work. I’ve lived alone for a very long time, but to increase my rate to above 75% makes me want to do it unless the house is falling over. It’s definitely the Mustachian thing to do. She does have cable, but I think I’m convincing her to cut the cable cord with all of my free and low cost alternatives (she didn’t know that you could use much of Hulu for free), so I won’t have to deal with that life-suck. We’ll see in the next week.

    • Amanda M. February 4, 2015, 9:16 am

      As a follow up to this, I decided to move in the coming months from an apartment to a small 3 bdrm house with a roommate. This will lead to at least 62% forced savings (my monthly Vanguard investment will be increased) and greater accountability in life. She’s already agreed that if I can get her 2 shows online (one on ABC and one on PBS), she’ll cancel the cable. That’s a piece of cake, since I watch both of the shows currently. Here’s to early retirement!

  • Marisa January 29, 2015, 3:26 pm

    Isn’t this way of calculating net worth a little unfair to renters? I will never have any home equity but I still have to pay for housing every month. On the plus side I will not have any mortgage debt either.

    • Vik January 29, 2015, 4:19 pm

      Marisa – mortgage debt is broken down into 2 components:

      1. interest which is an expense like rent

      2. principal which is like saving as long as you live in a market where you can sell your house if you needed to to access the equity.

      Is it fair to renters? Yes. Rent is a straight up cost in exchange for a place to live.

      Mortgages offer accommodation and equity in one package – which in a lot of markets is a good deal.

      — Vik

    • Amanda M. January 29, 2015, 4:26 pm

      There are benefits of renting and benefits of buying. One of the benefits of renting is that you can move with very little notice and little hassle past getting out of a lease. A home can fluctuate wildly in price, both up and down, so that portion of a homeowners net worth can change relatively quickly.

      We all know that life’s not fair, but this formula for net worth is pretty darn fair in my opinion.

  • Rahul Suresh January 29, 2015, 4:43 pm

    I really appreciate the simple formula and breakdown of the numbers. This is a huge help for the financially inept like myself. Now instead of paying a yearly fee to see them it’s available every day for free.I had been wondering how to convert a pension into net worth. see that income taxes are not pulled out of the gross side of the savings rate calculation and understand the logic given, however isn’t this understating the spending rate?

  • Steve January 29, 2015, 5:13 pm

    Why isn’t the 401(k) plan deduction of $692 included in the MMM take home pay calculation?

  • JB January 30, 2015, 8:56 am

    Really what we should do is divide up spending in mandatory spending and discretionary. Then you see what you really need to just exist on without entertainment/travel since that is all optional. But even if we spend $80K now doesn’t mean we will spend that in retirement since then I will have basically a fixed income and I can then control the over and above spending. I can spend $150 on a ticket to Rush now since we are still working. Once we are retired for a couple of years and I see what we are spending, it is easier to cut back on eating out or other items in order to either travel more or keep under a spending limit. If you have no house or car payments and live in a reasonable house, you really don’t need a ton of money on a day to day basis. Not many people have friends that sit around the table and drink water so being sociable has a cost unless you like being a hermit. I can listen to my sports teams on the radio for free and I can probably do without much TV once I am retired because it can be a time suck. But everything has a cost and if your thing is bourbon or cigars, as long as you can afford it, who cares. If you only have $10K a year to spend, you are going to be limited. We can’t all have the same lifestyles.


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