The Adm Karpinsk you see today is flabby and weak. Although consumers often compare themselves to the Mustache family and determine they aren’t ready to become “so extreme”, in reality the only extreme thing is how far we are from living a truly frugal lifestyle these days.
The reason for this is of course that money is no longer a concern. We started out with an already-cautious retirement savings plan, and then ended up earning more money than expected after retirement, which naturally leads to an ever-growing surplus.
In this situation, as I argued with my brother recently when attempting to pay for his stuff at Costco, the logical behavior is to make most of your decisions as if everything were free. The catch is that you still have the same environmental and social values, which means you will still avoid blatantly wasteful consumption or personal pampering when you know your money could be used more efficiently elsewhere to improve your world. But you might find yourself splurging on organic groceries, giving more gifts, or taking the expensive toll road to avoid a traffic jam.
One of the keys to a resilient life is reminding yourself that you currently have it very good compared to how things could be, and that if the going ever got tough, you could easily re-train your Frugality Muscles to be bigger than ever before. The moment you convince yourself that your current life could not be improved and you are entitled to everything you now have, is the moment you become a helpless Consumer Sucka.
So what if I did wake up one morning and find that everything was gone? All my bank accounts, investments, 401ks, mortgage-free houses and other assets. Let’s assume that this blog disappeared too, since this thing alone is now producing enough income to fund a family’s lifestyle, meaning the exercise would be meaningless if you left it in.
It would be a shock, to be sure. I’d mourn the loss of so much savings. The proceeds of a lifetime’s work, reversed. And most importantly, the freedom to not work for a living, removed. Suddenly I would have no choice but to start earning money, because without it, my family would be out on the street within months.
The first thing would be to assess our goals. We would be 38-year-old parents with a 7-year-old son and not a penny to our names. Not an uncommon situation today, as some people of this age actually have negative net worths. The first priority would be to maintain a healthy environment for the boy – somewhere he could continue to get a great education with the support of a warm community around him.
Note that I didn’t say “we would keep our current house and not consider changing schools”. This would be locking in an assumption that really should be challenged. But since we already live in an affordable, bike-friendly area with a great school system, we would probably stick around, but just move to a smaller house in a less expensive neighborhood nearby. Since owning is cheaper than renting in my area, we would still apply for a mortgage and buy a house if at all possible.
Current house: $400,000. Monthly cost (mortgage + taxes) if financed: $2100
Replacement house: $170,000. Monthly cost (mortgage + taxes) if financed: $911
Of course, in order to even qualify for such a mortgage, I would have to start earning some money. Mrs. MM and I both value financial independence, so we would probably both take full-time jobs in order to rebuild our savings as quickly as possible. But in this parenting stage, careers would still come second. So instead of going back into engineering ($100-$150k/year), I would probably just be re-open my general contracting business ($80,000/year) instead. The Mrs. would either work part-time in finance ($60k) or start accepting all possible customers for her local real estate business (which would probably bring in about $100k). Instant high income … in exchange for very little free time. And, of course, I’d probably start another blog.
Combined Gross Income: About $150,000/year
If you’re not comfortable with the easy money we are earning in this example, substitute your own value – even $25,000 if you like. From our perspective, we would be “broke” either way, because we measure wealth by assets rather than income. Which means that at least initially, we would be spending as little as possible.
Next we’d want to trim some of the fat that has accumulated on the rest of our lifestyle. We keep two vehicles in the fleet at the moment, but since we’d be starting from scratch, we would have no car and no savings to buy one. If possible, we would just operate car-free, since our city has high-paying jobs, groceries, and schools all within a 5-mile radius from home. But if a car were a necessity, we would set aside our first $5000 of free cash, and use it to buy a good mid-2000s manual transmission hatchback.
Monthly car cost (depreciation, registration insurance, fuel, maintenance) for 330 monthly miles of driving: $125 – note that most families drive about 5 times this amount and spend about 10 times this amount.
Groceries would be scaled back from the current “Retired Millionaire” style of eating to more of a nutrition-and-cost optimized one. More potatoes and peanuts, less organic chicken breasts and almonds. More Costco, less Whole Foods. We’d still make fancy salads at every meal, which I feel are the foundation of good nutrition. Even so, we could probably cut our budget in this area down by 50%, leaving about $250 per month
Travel, one of the biggest budget items right now, would be brought down. Winters in Hawaii might be cut, but camping trips in Colorado would be increased (there are even epic spots close enough to access by just throwing your gear in a bike trailer and pedaling for 90 minutes!)
Luxury items like gadgets, new clothing, furniture, gym memberships and other things could wait for financial independence. So our miscellaneous budget would be close to zero.
Given this suite of lifestyle improvements, what would our new annual spending be, if we one day woke up broke and theoretically decided to spend as little as possible?
If we refer back to the latest MMM family spending report for guidance but plug in our new numbers, we’d end up with the following totals:
Category Annual Amount Comments
Housing 12000 Including maintenance (all DIY, of course)
Utilities 1200 Water, electric, gas, trash
Food 3000 Transportation 1500 Mostly bike, occasional car
Vacations 1000 Not strictly necessary, but living it up a little given the high incomes in this example
Phone 240 Two $10 plans at Airvoice or Ting
Internet 300 City wifi at @25/month
Cable TV 0 Haha.. obviously this would be zero..just threw the category in for your amusement
Restaurants 0 Sorry, not while broke
Beer/Wine 240 One good Bota or Black Box per month to share with friends - another luxury. Transfer to restaurant category if you don't drink.
Clothing 200 You can look incredible, from that thrift shop down the road...
Everything Else 1000 Books, activities for kids, whatever we forgot above.
Total 20680 Not too bad.
At almost $21,000*, you can see that this total approaches the current MMM family spending – but the difference is we get “free” housing right now due to having a large chunk of money tied up in a mortgage-free house, whereas the broke family has to pay interest on theirs – meaning housing accounts for over 50% of their budget. Yet in real life, we squander this subsidy and more on additional voluntary expenses.
But in my Broke lifestyle above, the equity would start to build in that little 2-bedroom house, and I’d fix it up on the weekends, and we’d be working hard in our office jobs every day.
Given the income above, and combined with the tax savings provided by maximum 401(k), contributions this would lead to roughly an 80% savings rate, on an after-tax basis. And when you look up what happens with an 80% savings rate, you can see that we’d be financially independent yet again in about 5.5 years. As the financial cushion built back up, we could let our foot off the brakes again and become sloppy as we are today. But only when we could truly afford it – because that’s just how getting wealthy works.
Heck, with this level of expenses, even a dual-minimum-wage family would approach a 30% savings rate, before even taking into account various low-income subsidies like food stamps that kick in at that level.
Investments: Of course, a high savings rate does not lead to financial independence if you leave the money in a savings account or a mattress. There, the value of the ‘stash would be eroded by inflation on one end even as you nibble away at the other end for your grocery shopping. Thus, you need to invest it to generate passive income (and eliminate interest-bearing debts, which is just another form of investing).
In this example, we’d allocate the savings as follows, going for a mix of security and higher risk/return:
First $35,000 per year: 401(k) plans: this represents maximum contributions for each of two income-earners. If at all possible, we’d invest it in whole-stock index funds with an expense ratio under 0.2%, like Vanguard’s VTSMX. Note that even if you’re planning on early retirement, you can get your money back out of a 401(k) penalty-free, as shown here.
Next $30,000: Extra Mortgage Payments: This would get the mortgage paid off approximately at the same time we reach the other savings goals, which is a nice time to lose a mortgage. I assumed a 4% mortgage interest rate in the initial scenario, so the economic effect of this is similar to buying a 4% bond.
Everything Else: A rental property (2-to-4-plex**), and Lending Club notes (5% of portfolio).
In exchange for a bit of local real estate and business knowledge, rental properties in the right area can yield over 8% after inflation and expenses, or more if you leverage them by locking in a low-interest mortgage. Since this is considerably more than I would expect from the major stock markets at current levels, rentals are a way I don’t mind trading some interesting effort for higher yields.
And Lending Club, at least until additional investors and large funds dilute the good returns, has been a continued success based on my experiment so far, so I would probably allocate a small amount of this imaginary future nest egg there as well.
I’m not saying living a spartan lifestyle and investing everything else is completely easy.. but it gets easier when you let go of assumptions like “I must have a car that I buy on credit and drive 15,000 miles per year”.
When you compare my personal barebones estimates above, based on 15 years of careful cost-tracking while living in Colorado, with this cost of living calculator put out by the Economic Policy Institute that tells me I’d need $58,000/year to maintain a basic lifestyle in the similar Fort Collins/Loveland area, you can see that challenging assumptions can make all the difference.
* this budget assumes that health insurance would be covered by an employer, which is likely in our case. If you want a less cushy scenario, add in the $237/month we currently pay for health insurance, plus maybe $400/year in out-of-pocket medical costs.
**For even more efficiency, you could change this example to have us buying a 4-plex and living in one unit while renting out the rest!