And I’m even more excited to hear about people making big changes early in life, because then they get to enjoy many decades of benefit from those changes. Freedom, unleashed creativity, lower stress and much better health – all by just redesigning your own life to be more efficient.
This brings us to our latest case study, where a new reader hit a crossroads and could have gone either way. He made it to adulthood with a good education and a solid job. And somewhere in there, he had a buried instinct to make smart decisions, but social norms had him traveling down a different road – the one that leads to a lifetime of being broke.
[Update: after publishing this post, several people wrote in to point out my title was a bit insensitive. I looked into their claims and I agree – because of the incorrect parallel between my joke about financial suicide (where we have a choice in the matter) and actual mental health in humans, where people often don’t have choices. More info on the issue here.]
The following conversation has been edited a bit for length:
Good evening Triple M!
I have been obsessively reading through your archives for about 3 weeks. I have finally reached a point where I am compelled to reach out and see if you are interested in doing a case study, me being your next victim.
Firstly, a little bit of background. I am 25, single, college educated, fully-employed, and love long walks through the mountains. My upbringing was not very frugal, both of my parents worked hard, but they also spent hard. Reading this blog has been the gasoline to a little, itty-bitty fire that I had deep down inside me. I knew the right thing to do, but was so unsure, and always got grief for my “fantasyland” ideas– even from my parents. This blog has provided a community and case studies showing that it can and WILL work.
Secondly, I have made some fucking STUPID mistakes. When I say stupid, I mean STTTTUUUUUPPPIIIIDDDD. College credit cards? Check. Crazy loans for school for better housing? Check. Brand new car with bad terms? Check. Personal loans? Check. Spending on useless garbage that I have nothing to show for? Double-check.
Now, most of these sins in the way of the life of “mustachianism” occurred during college and the 2 years after. But I am still paying for them now. I am 25, soon to be 26. Single. No kids. I live in a 1-bedroom apartment as close to work as I could find that wasn’t $1,100/month.
- Income: $50,700 – a good salary for my section of the country (Northwestern PA).
- 11% of base income goes into a 401(k) with my employer matching 4%. Great.
- Now for the part that makes this all unique: a Bonus of 15-25% of our base salary goes into an Employee Stock Option Program. 100% vested after 6 years, I am in year 1 of this company.
- Total Annual Income: $50,700 + 4% + 20% = Roughly $63,000 ($52,000 after tax)
- College: $44,440 – interest rates vary between 6-6.75%
- Car: $21,710 – 2015 Jeep Wrangler JK Bought new at 5.09%, 25,000 miles on the odometer
- Credit Cards: $9,990 between 15.99%-24.99%
- Personal Loan: $8,300 4% interest only loan. Comes due in full 02/2018
- Total Debt: $84,440
- Rent: $480/mo.
- Internet: $50/mo.
- Groceries: $160-200/mo.
- Car Insurance: $100/mo.
- Electric: $30/mo
- Gasoline: $140/mo. (50 miles round trip, no chance of moving closer, piss-poor MPG)
- Car Payment: $400/mo.
- School loans: $185/mo. (for 20 years– paying off higher interest first, this is lowest interest)
- Personal loan: $30 (5% interest only loan. Cash backed)
- Credit Cards: $300/mo.
- Cell phone: $80/mo.
- Total Spending = Roughly $20,520 per year
No cable. I don’t drink unless its free. I am reasonably healthy and workout daily with a workout set I have acquired through the years.
The only other thing I do a lot of is travel! Love it, can’t live without it.
I have cut down my stupid spending drastically. I embrace your challenges and see how well I can do. This is my new idea of fun. I get the weird looks, snarky comments, and general distrust from the Jones’ family.. and I LIKE it! It’s fuel to the fire, baby.
With dang near two 401(k) accounts, once debt-freeness is achieved, shouldn’t I be able to retire early– twice as fast? I so badly want it now, but I realize that this is a marathon. It took a long time for me to get fit, and this is no different! I want to flex that mustache muscle, and bust that hell hole of a mindset we call, “Work for 40 years then maybe retire.” Fuck that.
– Justin Jeep in PA
Wow, what a great attitude!
The first thing that strikes me is while Justin’s debt looks bad, his cashflow situation is actually pretty good. When putting together that summary of his story so it would fit in a tidy box, I combined a few things and converted all numbers into monthly and annual figures so we could get the big picture. And that picture shows that he is earning about $52,000 after tax, yet only spending about $21,000. Unless that mysterious “travel” comment blows the budget later on, since it was not explicitly broken out in his spending.
So although a good portion of his paychecks are currently going into retirement accounts and paying off debts, those still count as savings, which means he is saving $31,000 per year, or about 60% of his take-home pay. The Shockingly Simple Math of Early Retirement tells us that even in this situation, he’d become debt-free within about three years, and keep rising upwards after that, becoming wealthy enough to retire within a total of 15 years.
It’s important to remember that this excellent performance is the new Justin. If he had carried his old college habits into full adulthood, you’d also see a bar and restaurant tab of $1000/month, a few hundred dollars of random subscriptions and services, and a lot more spent on rent, clothes, gadgets, and other treats.
There’s no upper limit on how far you can take the Single Fancy Man or Fancy Woman Lifestyle, as the Toronto Pharmacist that spends his whole $130,000 salary while living with his parents demonstrates nicely. Earning more is great, and I highly recommend it. But by definition it is impossible to out-earn the habit of spending all your money.
On the other hand, if Justin’s spending had been this efficient (relative to income) all along, he wouldn’t have ended up with $84,000 in debt in the first place – in fact he would already be above the waterline
So he has made enormous changes for the better, and in the process chopped about 25 years off of his mandatory working career. But he still wrote to Adm Karpinsk with an open mind, which means he is ready for more. Given his situation, what would I do? Let’s power through and fix up the rest of this situation.
Step 1: Stop Driving Around in an Offroad Toy Owned by the Bank
Justin currently lives in rural Western Pennsylvania, which is a collection of very small towns which are very far apart. This means he leads a life with a lot of driving, which means he needs to have a car that is incredibly well optimized for frequent long drives. But instead, he has a 2015 novelty toy based on 1940s-era military nostalgia with no practical use other than bouncing itself through a rock-strewn canyon while you drink Coors Light from a cracked Nascar Coozy and your friends sit on the sidelines and occasionally yell out “Yee Haw!”
Even worse, this thing came with a sticker price of more than half a year’s gross salary, and he didn’t even have the money to buy it – he had to borrow this toy from a bank!
Adm Karpinsk’s first rule of cars is you never borrow money for a car. One of the next rules in that book is you can’t drive a Jeep on a paved road. Never. If there’s pavement, you use a front-wheel-drive hatchback that is either a 4-cylinder manual, or electric. If there’s snow, you put some goddamned snow tires on it. If you like off-roading, get some hiking boots or a mountain bike and use your muscles like a badass, instead of wasting your money on a big elaborate motorized La-Z-Boy contraption that allows you to go over bumpy terrain while sitting down and pushing some stupid power-assisted pedals! Motors are not a valid form of recreation.
Don’t even come to me with exceptions until you at least get that second comma in your net worth. So (in more polite terms), I told Justin to sell his Jeep:
My man’s Response:
MMM: What?! Holy shit that is excellent! Congratulations!
I feel kinda sorry for the next guy, since he now has the liability. But not everyone is a Mustachian yet. Keep me posted on the great progress!
Holy shit is right, Pete!!! After ironing out the details today, we agreed on an even better deal for me.. $24,000 sell price, and I included all my spare/original parts! If I tried to sell those I could probably get $750 with a ton of hassle and patience.. So, I’ll take that extra $1k!
It’s unfortunate, but who knows their situation. This individual could already be FI and I’d never know. All I have to say is, Godspeed.
Another nice note is that I get a prorated amount of my gap insurance back! Looking like that will be around $600-$650! Woohoo!
With step 1 complete, we had closed Justin’s biggest gaping financial wound. The $400 per month payment was going almost entirely towards depreciation, whereas a proper used car like a late-2000s Honda Fit depreciates at less than $100 per month. Plus, the Jeep was using at least double the fuel of any reasonable on-road machine. On top of that, his insurance was through the roof. All-told, he was wasting about $450 per month compared to an optimal car choice, a burn rate that compounds into about $77,000 every ten years*
Step 2: Consider Moving Closer to Work
Justin’s round-trip drive of 50 miles is at least 5 times the level I would consider absolutely insane. He claims that living any closer would bump his rent up from $480 to $1100 per month, but a quick review of Google Maps and Craigslist shows this is not the case:
Just by visiting his region on Craigslist, searching for “housing” and selecting “map view”, I found a solid number of entire 4-bedroom houses for rent in the $700 price range within walking distance of work, and apartments for even cheaper.
Adm Karpinsk’s ideal strategy: choose the nicest large house you can find, then rent out a couple of bedrooms to friends to give yourself a net rent of near zero. Your friends will also help you split the cost of Internet service, and you can share resources like tools, expertise, books, homebrewing equipment, music and instruments, movies, and errands like bulk-buying runs to Costco.
And of course, bike to work and pocket the extra $300 per month that even the cheapest 50-mile-roundtrip car commute would cost you (more like $700 if you are using a newer/larger vehicle).
I can’t stress enough the killing effect that a long car commute has on your life. It has been studied again and again – spending an hour in the car is far more expensive than just the $20 in direct transport costs and $25-100+ per hour in lost personal productivity. The physical and mental health costs, and of course the risk of being shredded by smashing metal and glass, are much larger.
Step 3: Make Sure your 401(k) Money is Going Somewhere Reasonable
Your employer plan looks generous, but the 401(k) options that small companies offer are sometimes questionable. Make sure your money is going to a all-US or all-world index fund with an expense ratio well under 0.25%, not an “aggressive growth” or “managed” fund. If no such options are available, have a talk with your HR representative and suggest that your company hook up with the small business 401k programs offered by Vanguard or Betterment.
Step 4: Streamline Debts and Smaller Expenses
Your mobile phone bill is $80 per month?! What is this, 2002? The highest reasonable phone bill these days is about $20/month with Republic Wireless, or roughly $30 with Google Fi if you need cheap data while traveling internationally.
Since high-interest Debt is an Emergency, I’d suggest reducing contributions to your company 401(k) to 4% to get the company match, and putting the rest into the credit card debts until they are gone. This is because paying off those cards is equivalent to a 15.99-24.99% guaranteed return on your investment, something you won’t get anywhere else.
Step 5: The Big Picture
Justin is in a good starting place, but that does not mean it’s time to become complacent. For example, his current employer is in a very remote area, far from any town of more than a few thousand people. And it’s in an area with one of the more brutal winters of the United States. This means a lifetime of driving on icy roads and through blizzards – unless he chooses to change the situation.
If you have the amazing privileges of a good education, reasonable health, and a strong work ethic, there is no reason you can’t make over $100,000 per year, at a job you really enjoy, and live within walking distance of work. To me, this is the Holy Trinity of efficient employment design and it’s worth holding up as a goal – knowing it is absolutely possible even if you choose to compromise on one or more aspects to meet your own preferences.
I set $100k as a target because it allows you to live at middle-class levels and still save over 60% of your income, which means financial independence in roughly 10 years. And it’s an income that is not all that rare in the economy without requiring a highly specialized skill. But it certainly isn’t a limit – I’ve heard from a number of people who make ten times that amount, even in their 20s.
Life is not an income competition, but I feel there is a mental barrier that forms in the middle class, based around the fact that the US median household income is currently $52,000, meaning that half of households earn above this amount, and half below. (For individual workers, the median is even lower).
But put it this way: if you are smart enough to design car-commuting out of your life, you are already in the top 10% in that department. Work and income are just another strategic game. Especially if you open yourself to the Joy of Self Employment.
Justin is set for a bright financial future. Many things will change in both his income and spending pictures in the coming years, but by just thinking about the long term implications of each decision, and using the principle of constant optimization, he’ll take a more efficient course. Although the changes will feel easy and small to him, they will make the difference between “Broke” and “Millionaire” by the time he reaches my age. And because he is on such a prosperous path, he can give himself the Gift of not worrying about money along the way.
Have a great time, dude!
Here’s my article on learning how to calculate your savings rate, net worth, and take-home pay.
Calculating take-home pay after taxes: I used this thingy on calculator.net
Since this article addresses cars and driving in a snowbelt area and fall is coming, find out why All-wheel-drive does not make you safer.
* To calculate the value of a monthly expense over a 10-year period, compared to investing that money conservatively instead, multiply the monthly expense by 173.