Mr.Money Mustache on finance and positive psychology. Specialties are doing the math of everyday life, and understanding the concept of the hedonic treadmill.
I am a big fan of his. If you want to retire in ten or fifteen years, and yes that’s not only possible, but achievable without any major sacrifices, read him. He is someone who has taken what science knows about happiness and really applied it.
It’s possible and achievable without major sacrifices with high probability, if you’re reasonably well paid.
The basic tricks are (1) put a really substantial fraction of your income, at least about half, into savings—index funds or similar—and (2) learn to live a less gratuitously-spendy life than is normal in the affluent West, especially in the US. I strongly endorse both of these; but living on half your nominal income is much much much easier, and requires much much much less sacrifice, if that income is $100k/year than if it’s $30k/year.
And if your investments misbehave badly enough, you’re screwed. Firstly, if you hit a bad market crash before you were hoping to retire, your retirement date gets pushed out. Secondly, if the longish-term performance of the market turns out to be anomalously bad, you run out of money after being retired for years. You’re supposed to save enough that the risk of the second failure mode is really low, so the question here is how comfortable you are with inferences like this: “Over the last 100 years or so, there’s been no 40-year period in which you’d have run out of money if you held a broad stock-market-index-like portfolio and took out 3% of the initial capital, inflation-adjusted, every year; so you’re safe adopting such a strategy now.”
(I do not know whether the specific statement in quotation marks there is correct. There are studies whose conclusions have something like that form. Look them up before making retirement decisions.)
[EDITED to add: Just to be clear: I really do think the mustachian approach is a good one, and I follow it myself, and I do think anyone reasonably well paid who follows it has a very good chance of a comfortable early retirement. But I prefer not to see these things overstated, and I prefer to avoid formulations that—wrongly but seductively—encourage wealthy people to look down their noses at poorer people for whom living that way is very much harder.]
“Over the last 100 years or so, there’s been no 40-year period in which you’d have run out of money if you held a broad stock-market-index-like portfolio and took out 3% of the initial capital, inflation-adjusted, every year; so you’re safe adopting such a strategy now.”
Assuming that you invested in the United States stock market. Argentina would have looked like a good bet back in the 1920s, but it hit some really bad times...
Mr. Money Mustache is very US centric. YMMV with the investing advice if you are in a country with different tax codes or a smaller stock market with less international exposure. The advice on how to save money is good no matter where you are.
That is absolutely true, although “reasonably” in this case works for average American household income (about 50k) if you don’t live in a very high cost of living area. The same techniques that let a middle to high income household (50k+) retire early only let a 30k household make ends meet and save some money to retire comfortably around the “official” age of 65, but that’s still much better than most Americans do. His thoughts on hedonic adaptation are pretty much the same as we talk about here (having probably drawn from the same sources), and not falling prey to the tendency to spend money without getting much utility from it is more key to the whole early retirement thing than earning power. That is to say, not spending money is more important than earning money.
not spending money is more important than earning money
On reflection, I think this is an oversimplification. Which is more important depends on how easy they are. For most of us, reducing spending is easier than increasing income. But if you’re poorly enough paid, reducing spending may be incredibly hard and at least in principle you can increase your income a lot (special case: by taking a job, if you’re currently unemployed and the tax/benefit system isn’t too badly screwed up where you are).
Increasing income probably has a higher return on investment.
Sure, coming up with a presentation on why you should get a raise/promotion takes hours of preperation, vs deciding to not buy a latte, but after you’ve taken the 5-7 hours it takes to build that presentation, you’ll make more in one year from it than you’ll save in 5 years from not getting that latte.
I find it helpful to think of all nontrivial expenditures, income gains, etc., as (1) representative of a consistent “strategy” and (2) annualized. So when you choose to buy a latte, you should consider what general principle you’re acting on (e.g., “have a latte every day”, “have a latte on Monday mornings when thirsty and in a hurry”, etc.) and then figure out what annual difference it will make. If you get a raise it’s automatically annualized (though you should also think about its effects on your future salary, hireability, status, etc.). If you get a one-off bonus from your employer, you should consider it (something kinda like) equivalent to the annual income you can get from investing it. Etc.
(Of course you don’t want to be doing this in detail every single time you make a decision with financial consequences. But if you get into the habit of thinking this way, your quick judgements will probably get better.)
Mr.Money Mustache on finance and positive psychology. Specialties are doing the math of everyday life, and understanding the concept of the hedonic treadmill.
I am a big fan of his. If you want to retire in ten or fifteen years, and yes that’s not only possible, but achievable without any major sacrifices, read him. He is someone who has taken what science knows about happiness and really applied it.
It’s possible and achievable without major sacrifices with high probability, if you’re reasonably well paid.
The basic tricks are (1) put a really substantial fraction of your income, at least about half, into savings—index funds or similar—and (2) learn to live a less gratuitously-spendy life than is normal in the affluent West, especially in the US. I strongly endorse both of these; but living on half your nominal income is much much much easier, and requires much much much less sacrifice, if that income is $100k/year than if it’s $30k/year.
And if your investments misbehave badly enough, you’re screwed. Firstly, if you hit a bad market crash before you were hoping to retire, your retirement date gets pushed out. Secondly, if the longish-term performance of the market turns out to be anomalously bad, you run out of money after being retired for years. You’re supposed to save enough that the risk of the second failure mode is really low, so the question here is how comfortable you are with inferences like this: “Over the last 100 years or so, there’s been no 40-year period in which you’d have run out of money if you held a broad stock-market-index-like portfolio and took out 3% of the initial capital, inflation-adjusted, every year; so you’re safe adopting such a strategy now.”
(I do not know whether the specific statement in quotation marks there is correct. There are studies whose conclusions have something like that form. Look them up before making retirement decisions.)
[EDITED to add: Just to be clear: I really do think the mustachian approach is a good one, and I follow it myself, and I do think anyone reasonably well paid who follows it has a very good chance of a comfortable early retirement. But I prefer not to see these things overstated, and I prefer to avoid formulations that—wrongly but seductively—encourage wealthy people to look down their noses at poorer people for whom living that way is very much harder.]
Assuming that you invested in the United States stock market. Argentina would have looked like a good bet back in the 1920s, but it hit some really bad times...
Mr. Money Mustache is very US centric. YMMV with the investing advice if you are in a country with different tax codes or a smaller stock market with less international exposure. The advice on how to save money is good no matter where you are.
As I said:
Indeed, some stock markets are better investments than others. (How far one can predict which ones is an interesting question.)
That is absolutely true, although “reasonably” in this case works for average American household income (about 50k) if you don’t live in a very high cost of living area. The same techniques that let a middle to high income household (50k+) retire early only let a 30k household make ends meet and save some money to retire comfortably around the “official” age of 65, but that’s still much better than most Americans do. His thoughts on hedonic adaptation are pretty much the same as we talk about here (having probably drawn from the same sources), and not falling prey to the tendency to spend money without getting much utility from it is more key to the whole early retirement thing than earning power. That is to say, not spending money is more important than earning money.
On reflection, I think this is an oversimplification. Which is more important depends on how easy they are. For most of us, reducing spending is easier than increasing income. But if you’re poorly enough paid, reducing spending may be incredibly hard and at least in principle you can increase your income a lot (special case: by taking a job, if you’re currently unemployed and the tax/benefit system isn’t too badly screwed up where you are).
Increasing income probably has a higher return on investment.
Sure, coming up with a presentation on why you should get a raise/promotion takes hours of preperation, vs deciding to not buy a latte, but after you’ve taken the 5-7 hours it takes to build that presentation, you’ll make more in one year from it than you’ll save in 5 years from not getting that latte.
I find it helpful to think of all nontrivial expenditures, income gains, etc., as (1) representative of a consistent “strategy” and (2) annualized. So when you choose to buy a latte, you should consider what general principle you’re acting on (e.g., “have a latte every day”, “have a latte on Monday mornings when thirsty and in a hurry”, etc.) and then figure out what annual difference it will make. If you get a raise it’s automatically annualized (though you should also think about its effects on your future salary, hireability, status, etc.). If you get a one-off bonus from your employer, you should consider it (something kinda like) equivalent to the annual income you can get from investing it. Etc.
(Of course you don’t want to be doing this in detail every single time you make a decision with financial consequences. But if you get into the habit of thinking this way, your quick judgements will probably get better.)
That’s a cool way to think about it.
For the record: I don’t disagree with any of that. (But, again, the whole thing becomes much easier as your income goes up.)