Some of this stuff is too good not to share with a broader audience. Last week, for instance, I featured part of my conversation with Gretchen Rubin about money and happiness. Today, by request, I'm posting a piece of my conversation with Mr. Money Mustache. Some of you will be pleased to hear that I actually edited this to make it more readable. Enjoy!
Pete, why don't you tell us a little bit about your background. How did you become a personal finance expert?
Mr. Money Mustache
Well, I'm not sure if I'm even a personal finance expert now. But the way I became Mr. Money Mustache was I was raised as a kind of low-key, lower-middle-class kid with three siblings in Canada. Canada's that country to the north where things are just a little bit less flashy than they are here in the United States.
J.D. Do you mean America's hat?
MMM Yes, or the 51st state, or whatever. So, anyway, I went to school and graduated in computer engineering. I worked in that field for a while, and then I moved to the United States. I continued my Canadian habits, which are basically not spending everything you earn, with my new higher U.S. salary. I found that just before age 30, I had enough money to retire. [My wife and I] quit working in order to start a family. That was about eight years ago.
J.D. What it sounds to me as if you're saying is that Canadians can move to the United States and in 10 years of working, they can retire.
MMM Yeah, you don't have to be Canadian to do that. I mean, you could also do that if you're Brazilian or Swiss. But maybe even American, if you follow the concepts of the Mr. Money Mustache blog.
The whole point is not following the materialistic trends of this country, which is kind of unique in the world for being one of the most caught up in this trend of: “A bigger house is better!” and “A faster car is better!” If you really want the boiled-down [version] of how this all works: My wife and I saved just a little over half of what we earned, half of our take-home pay. We earned a little more than normal, but not a lot. We invested it. Every time we got a raise, we didn't increase our spending; we just increased our saving.
At some point, we had enough. We paid off our mortgage, had some Vanguard index funds, had our retirement funds. Our low-cost lifestyle — basically around $25,000 a year — was easily covered by the investments we had. Luckily, we quit our jobs right around the same time we had our first and only child, and we've been going strong for the last eight years under this plan. Life is good.
MMM I know a lot of people who spend a lot less than my family because they're even better at this stuff than I am. And they're very, very happy, satisfied people, which is really what life is about. It's getting a happy, satisfied life.
J.D. Absolutely. I agree with you. My first line in my first book is, “You don't want to be rich. You want to be happy.” And when I write, most of my writing that I do is not about wealth or about money management. It's about happiness and finding a life that is contributing to your well-being.
MMM That's very well said, because if you double your wealth, or if you cut in half your needs or desires, you end up in exactly the same place.
J.D. Right. So, you mentioned Mustachianism a little bit ago. You've built this whole — I don't want to say cult…
MMM You bet. I like to call it a cult.
J.D. OK. A cult. A cult of Mustachianism. Pete has built a following around his philosophies. And one of your philosophies really is what a lot of people see as extreme saving. What I mean by that is, in general, you will hear people say, “Oh, you should save 10 percent of your income,” or, “You should save 20 percent of your income.”
But from what I know of your philosophy, you're saying, “You know, 10 percent or 20 percent isn't enough. Yes, if you're diligent about that, you can retire at age 65. But who wants to retire at age 65?” So, you recommend saving more. Isn't that right?
MMM It's true, yeah. I wouldn't even call it extreme. I just call the philosophy slightly less ridiculous than average.
J.D. Why 50 percent of your income?
MMM Well, that's just kind of a nice, easy to remember goal. It really depends. You have to say, “Well, if you're lower income and you have a large family, then it might be harder.” In general, though, if you just take the typical middle-class person or family, then saving 50 percent of the take-home pay is quite possible. If you do that, and you just invest it in very average, kind of passive stuff — index funds — then it'll take you about 17 years to become financially independent.
So, if you start that at age 20, you're all set to go at age 37. If you're 40 now, and you start with no money, then it's going to take you to 57. But it's not really that bad, because Social Security is going to kick in and speed things up. And your kids are going to grow up, which lowers your cost of living.
Some people never have enough to retire. If you have no savings and you hit Social Security age and your lifestyle cost is $5,000 a month, well, guess what? You're going to have to keep working to make up the difference.
J.D. I think you just hit on an important point, Pete. Because of the power of compounding, and because of a lot of other things, it's actually easier to do this stuff the younger you start.
Before I talked to you, I met with a friend who wanted some financial advice. We were talking about her son, who was 22 years old. Her son has a lot of money for a 22 year old, because he's working three jobs. But he spends all of his money, and he's always having to borrow from his parents.
And I said, “You know, if your son would just sit down and right now make a commitment to save 50 percent of his income from now until forever, it would have a huge impact.” Because if he could do that, then by the time he's 40 — by the time he's my friend's age — he would have all the money he needed for the rest of his life, as long as he maintained that same lifestyle.
My friend couldn't really grasp the math. And to be honest, I couldn't explain it, because we both had a couple of glasses of wine. But the point I'm trying to make is, it's much easier to do this stuff if you start younger. That's not to say you should not start if you're 40 or if you're 50. But wherever you are, you should start as soon as possible to do these things.
MMM Well, I have a slightly different perspective on that. I would definitely agree that starting young is awesome, but I think that's more because flexibility rather than a financial thing.
Here's the thing. Traditional financial planners are like, “You know, start at 20, and save a tiny percentage, and just do this for a super, super long time, like 40 years. And if the stock market just keeps appreciating at whatever, 9 percent — they usually use high numbers — then you'll have, like, 4 million dollars by the time you retire. The key is that you invest it for 40 years. So, they're emphasizing starting young because of allowing a huge amount of compounding.
J.D. Right. They're emphasizing the time aspect.
MMM Yeah. They're emphasizing the power of compounding. You know, compound interest over a huge number of years. Like, half a human life span. And that's true. It's valid. But my point is, who wants to work for 40 years?
If you're trying to retire or become financially independent in a short time frame, like 10 years or 15 years, the compounding isn't nearly as important. At that level, what matters is how efficiently you can run your lifestyle, how low you can get your cost of living while maintaining an awesome life.
That's a much bigger factor than an exponent multiplied by the number of years you're going to be working.
J.D. So, it's basically trying to boost your saving rate as high as possible. Or, as I say in my guide where I write about being the chief financial officer of your own life, boosting your profit to the highest level possible. Because the greater your profit, the shorter amount of time it takes.
MMM Yep. And then, to keep the business metaphor, if you lower your operating expenses then you can coast on a lot less once you are financially independent. So, get a high profit margin, get those OEs low. The thing about operating expenses is it becomes a habit, stuff that's just automatic, and you're not actually making sacrifices.
For example, when I need to get groceries right now, I just hop on my bike and I go there, and I bring a trailer if I have to carry a lot of stuff. I'm not making a sacrifice. This is just what I do. That's just how I get groceries, and it makes me happy. I love being outside on my bike, whereas if I had not been trained in the art of getting groceries by bike, I'd have to take my big BMW X5 and waste, like, 10 bucks of car depreciation and gas every time I wanted, like, a green pepper.
J.D. [Laughter] For a long time, I was deep in debt, and I bought into the American way of life. I drove a mile to the grocery store, and I drove a mile home. It wasn't until I realized that I wanted to get out of debt that I started to change my habits, but even then I would still drive to the grocery store. It's only recently that I've changed my habits with this kind of thing.
Now I live in a place where it's, again, about a half mile walk to the grocery store. But I go up there every day, and I walk, and I wear a backpack. I take my backpack to the grocery store, and I think, “OK. What am I going to make for dinner tonight?” I'm able to fill up my backpack and take it home. I know that part of that is because I can work from home, but my point is — and I think Pete's point is — if you plan this into your lifestyle, you can make it so that it does work with a minimum amount of inconvenience.
And in fact, it doesn't even seem like inconvenience. It's part of your exercise. It's just part of your way of life.
MMM Yeah. I've never heard from a person who adopted these things and then said, “My life is less good now.” Every single person has said, “Well, yeah, I'm saving a lot more money, but I'm also a lot happier.” If I was just making recommendations to make your life suck so you could have more money, I would really not have a good, strong platform to stand on. This isn't about money. It's about a better life.
J.D. You and I are both supposedly retired, and yet we're doing this work here where we're talking to each other about money.
MMM Yeah, we're making a professional podcast. We're talking-heads commentators.
J.D. [Laughter] But while drinking. [Note: Pete and I had been talking for an hour before we began recording this conversation. During that time, we each enjoyed a couple of adult beverages.]
MMM At the same time we're drinking beer, so technically it's a little bit of retirement activity. But yeah, so this is the whole point. You're not going to sit around doing nothing unless that's your true personality type. Most people, especially if they retire young, find that their mind is freed up, and suddenly they can do stuff that's even better than what they were doing when they had a paid job.
And that's really what the human animal is. Most of us are designed to produce and learn and think, and that's when we're happiest. So, retirement to me just means you're free to do what you really want to do.
J.D. Exactly. The way I think of it is instead of doing what you have to do, or what you feel like you have to do, you can instead do what you want to do. Neither Pete nor I need to be sitting here right now talking about this stuff, but we both want to do it. We enjoy it. It's fun. And we feel like it's of benefit to us and to other people. We don't have to do it, but we do it nonetheless.
MMM That's why I'm kind of hoping that other people can free themselves. If the world's best minds were freed from their jobs, some people would keep those jobs because they love them so much. Other people would do things that are probably even more valuable to society, because they'd be locking on to what their minds are the very best at. So I think for society it's actually a good thing for people not to be dependent on a stream of money.
I might even end up earning more by quitting my job than I did working at my job. It's kind of ironic that financial independence allows you to earn more than you might have done if you hadn't saved your money.
J.D. I think this is exactly true. It doesn't work in all circumstances. I mean, if what you want to do is sit around and watch Survivor and The Amazing Race, you're probably not going to make a lot of money at that.
But there are other people who have wanted to pursue art, for example. Or I talked to a friend recently who said, “I love yoga, and I've always wanted to open a yoga studio. But I can't do it. I've gotta work at my job.”
I kept thinking, “Wow. If she would just take the risk! If she had saved enough for retirement at this point, maybe she could take that risk and open a yoga studio.” Knowing who she is and knowing her personality, I'm fairly certain it would be a very large success. But she's not going to try that until she's retired, and I'm sad that she can't try it now.