Saturday, October 5, 2013

What Purpose Does Money Serve?

If money is a means to an end, whats your end?
Thanks to Forbes, I have been introduced to a fantastically practical and already popular blog Mr. Money Mustache. Funny name, yes, but don't let that fool you, this blog is serious about money - saving money. This blog is the ongoing story of one Colorado family (a couple and their child) who set out to retire at age 30 and how they saved enough money ($800,000) to do so. I want to talk a little about their particular situation and how they value money. It's fairly uncommon and frankly, a little extreme, but it has greatly affected me this week.

The blog has a wide following and Mr. Mustache (yes, he refers to himself as this) has been featured on a number of outlets, including Yahoo's Financial Fit segments. Mr. Stach and his wife decided that they wanted children, but that working full time would interfere with child rearing, so they set out to retire then have children. At age 30 he and his wife retired with enough savings to live off the dividends and interest while leaving the principal intact.  While they initially calculated that they would need $600,000 to do this, they eventually retired with the $800,000 I mentioned earlier, more than they actually need.

How is this possible? After all, they had only worked for 9 years after college. The specifics of their situation and exactly what they did will explain how this was possible.  

1. He graduated from college with no student debt. I am not sure about Mrs. Stache. This is a huge bonus for any recent grad. Having no student debt meant they could essentially begin to save larger amounts immediately, eventually saving nearly 70% of their income each year.

2. They had excellent tech jobs. While they started out at on average $40K salaries, they eventually made between $70K and $125K each year. This type of salary increase alone will ensure this process takes more than 9 years for other couples. Toward the end of his (short tech career) he admits he felt like a big shot; being put up in great hotels, greeted by Town cars, and driven around while on business is no doubt food for anyone's ego. More about his view of wealth later.

3. They had only one child. Clearly having more than one child would seriously increase monthly expenses, although with the passing down of clothes and other things, I suppose it might be lower than immediately thought (although insurance and college remain).     

4. Probably most important: they seriously minimized their expenses. This means never buying a new car, stocking up at the store during sales, and avoiding unnecessary impulse purchases. You live in an area of the country where rental rates or home prices are high? This family purposely moved to a city in Colorado known for low cost of living. Here again many people would say, well, I need to be close to my job, which happens to be in X expensive city. His response is that most people living in large cities don't actually need to live there to work in their field, that essentially it is a choice. I think for many people this is true: think of all the other places people in a similar career path to yours are employed. I can be a librarian in Michigan and pay $600 a month for rent, or I could live in Boston, pay $1000 in rent, and be doing essentially the same job. Over 10 years that $400 difference is $48,000, with no consideration for the interest it could gain if invested.

When asked if they went without or felt out of place during their savings frenzy, they say no, they had dinner parties and did many of the same things as their friends. They believe if we stuck to what we really needed, rather than what we wanted or thought we needed, we could greatly reduce our monthly expenses. Rather than demonstrating in some perceptible way that they were amassing wealth, they simply saved and didn't allow themselves to be lured into the mentality that equates luxury with wealth. Mr. Stache equates luxury to a drug that when taken regularly can ruin your life.

Travel expenses are high and this might be one of the more extreme aspects to this family: Mr. Stache doesn't allow anyone to drive a car if the destination is somewhere in their city. Even after "retiring," this remains a policy, and if you watch the yahoo video you will see this in action. Bikes are free, so they bike around town. This is not to say that they scrimp in all areas of their life and live in a cardboard box. Until recently, they lived in a $400,000 house. But, last month they bought a new house which is not only much cheaper, but smaller by 1,000 sq. ft. Even in retirement they remain committed to reducing expenses. Reducing costs and extras seems to have become their lifestyle even after securing their financial future.

I read financial advice every week and nobody will tell you that the secret of being wealthy, or gaining financial security, is simply increasing your salary. The correlation just isn't necessarily there. Even those with modest incomes can save large amounts of money and live very comfortably (maybe even more comfortably) in retirement. This is where, in my view, this family differs from many others. Rather than viewing money as something amassed and then enjoyed as a result of years of toil at work, and viewing retirement as a time where you can be more free with what you've worked hard for, money is merely something that has allowed them to maintain the frugal life they've had all along. There is no appreciable change, and if there is, it has been down- rather than up-sizing. Wealth was not sought because they wanted to be wealthy and have this or that, it was sought so they were free to do something else they valued, and this wasn't vacationing, but raising their child together. Mr. Stache has continued to save, and in fact is still concerned with making money. Their new, smaller house needs some upgrades for example, and yet he is clear that the whole exercise will be a significant financial gain, so the process is a "go."

While his original goal was to have financial security to raise a family, I am unsure of how they think of their own wealth. Clearly they think it is useful, but at the same time they seem to boldly shed off any outward sign that they are wealthy, almost militantly appearing "not wealthy" to the casual observer. He lists some of their more expensive belongings (generally items inside their house) but seems embarrassed that they have them in the first place. Being frugal, and spending around $30,000 each year in total seems to have become their way of life, regardless of the money they're saving. Ironic that becoming wealthy has meant this family can choose to live modestly. I'm fascinated by this and am still thinking about the relation between the two. While living modestly is a necessity for most Americans, in this family's case, it is a reflection of their values.

Admirably, I think, they recognize how fortunate we are as a nation and continue to believe that spending excessive amounts of money on anything unnecessary should be avoided. They just don't buy into the notion of more is better. As a society, whatever that means, we have been lead to believe that wealth should be visible in some way to the naked eye. Maybe it is successful marketing campaigns, examples we see, or something else, but many of us correlate success and wealth with more [insert material thing here]. Bill Gates has a 10,000 sq. ft. house (true story). Does he need more than 1,000 sq. ft. to live in? Absolutely not, but he can afford it, so he has it. This is not a knock at Gates, only that it illustrates that when we have the ability to pay for something we often do, as a rite of passage, or a way to reward ourselves. Even more common is the fact that many people make purchases they cannot truly afford and in the end pay a much higher price by way of interest payments. To this Mr. Stache says: "You shouldn't drive a $20,000 car if you can't afford to invest $20,000 a year."

Maybe we reward ourselves because a culture exists that pushes the next (bigger) thing. Wanting what others have isn't new, or even unnatural, but maybe it is learned. I know I'm going a little out of the box for a librarian's post, but I think advice on the blog could really do some good in all our lives. Will you be the next family to retire early with a full bank account? Probably not. But maybe we could retire a little earlier and enjoy more of our time (and money) how we choose after we stop working 9-5. For the record, Mr. Stache hasn't quit working altogether, leading some to suggest he didn't retire at all, but he doesn't need to work as much as he likes doing certain things, some of which garner income.  I encourage you to take a look at the blog, there's advice from saving money at the store, to choosing a credit card with the most rewards each month (keep in mind the card is still paid off every month, so the rewards really are akin to free money). I found it useful and I hope you do too.

I certainly don't agree with the man 100%. I don't think his extreme message applies in every situation nor should you necessarily do as he says, but ask yourself: what purpose does money serve in my life?


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