20 ms·

Frugality Is Non-Linear (2019)

113 points by luu 6y ago

wenc 6y ago
I think my take-away is that a dollar consistently removed from one's budget and invested will compound and hence there exists a nonlinear relationship between budget adjustments and runway. It's definitely a relationship that people desiring financial independence can exploit. However, there's also time value to different classes of purchases. For instance, spending money acquiring certain skills early in life allows time for those skills to compound while the same investment later in life may have no utility. The commonly cited example is an MBA: getting an MBA in early career provides more leverage than if it was obtained in mid career or later. A late career MBA in most cases has vastly diminished signalling/credentialing value. Frugality (in early life) that optimizes for the date of financial independence (and runway) is not a bad idea, but seems to me that employed in isolation, it may increase the chances of landing on a local optimum when other more favorable optima may exist. People often talk about time value of money... but there's also the time value of time/age.
- jasonzemos 6y ago
  > A late career MBA in most cases has vastly diminished signalling/credentialing value. That anecdote seems to insinuate the essence of an MBA offers no substantive value, nor does even the achievement of the accreditation itself. It is the timing of the latter which projects the value. Is that a really low or a really high bar?
  - eachro 6y ago
    A large part of the MBA is access to a network of rich/ambitious/well-connected people. The earlier you have your MBA, the more time you have to take advantage of it.
  - wenc 6y ago
    This is reasoning that I've heard from MBAs themselves (I don't have an MBA myself, so would welcome any thoughts from actual MBA holders). The value of an MBA is in signaling, networking and knowledge, roughly in that order. In late career, assuming you're doing well-enough that you'd want to pursue an MBA, you'd already have amassed quite a bit of business knowledge from the school of hard knocks, that likely exceeds the theory b-schools can teach (although they can definitely still fill in knowledge gaps say in finance or strategy etc.). The marginal value of the theory is even less if you majored in business in college -- the difference between a BBA and an MBA in terms of coursework is generally not substantial. In late career, your experience and success (in different roles) is a generally stronger signal than credentials. In late career, you'd have developed a fairly good network unless you're looking to pivot to a totally different field or industry.
    - ghaff 6y ago
      At the time I got mine, it was sort of a necessary stamp to switch from the engineering I was doing in the oil business to a different role in the computer business. But a long time ago. So maybe signaling, definitely credentialing, some knowledge. For those looking to switch from fairly pedestrian post-liberal arts jobs, the MBA was huge in many cases. The networking effect has never been big for me. I'm fine with having gotten an MBA. Degrees like the one I got were less expensive in those days and it landed me in a good place. But TBH, my undergrad (from a good school) has probably opened more doors than my MBA ever did. (Had I gone into finance, the situation might have been different.)
    - maroonblazer 6y ago
      I got my MBA mid-career but my undergrad was in music and I switched careers 10 yrs out of college. So, while I'd amassed a healthy amount of business knowledge, the MBA taught me things I'd not learned on the job. That said, for many in my MBA cohort who had majored in business in undergrad, most I talked to said they weren't learning anything they didn't already know, save perhaps how to use their financial calculators in novel ways. Lends credence to the 'signaling' of an MBA, more than anything else.
  - toby 6y ago
    Whether it's for the essence or the achievement of a particular degree, getting a better job earlier in life has substantial effects on lifetime earnings. Whatever the credential gets you, for whatever reason, it's advantageous to have more time to take advantage of it. The parent could have used MD (there are some people who switch careers to become doctors in their 30s) and it would be the same... just having a chance to have been a doctor for longer will put you ahead.
  - ghaff 6y ago
    I'm not sure the comment is really fair but, in general, unless a company is paying for an Exec MBA program for a mid-level exec being groomed for higher level, a mid/late career MBA doesn't make a lot of sense in opportunity cost, etc. Even if you take out the signaling/credentialing value generally, absent someone trying to make a real career shift (which becomes more difficult as you get older), it's not clear what an MBA--rather than maybe a couple of focused classes--buy you after some point. (But, for that matter, a PhD or other new degree probably buys you less too at some point.)
  - deleted 6y ago
    [deleted]
mywittyname 6y ago
> Most people have a mental model of budgeting which is roughly linear. If you spend half as much money, your money will last twice as long. As you approach zero spending, your runway goes up to infinity. Well sure, but if you have investments, then it's not zero spending you need to approach, but your annual investment returns...Which is basically what the rest of the page discusses. The author is basically asserting that most people who budget assume a 0% rate of return on their investment. But since that's a nonsensical assertion, they instead rearrange the logic a bit to make a functionally identical statement which sounds less obviously flawed. The content in the article is good, but it could stand to have the "most people think...but they are wrong" section replaced with something more friendly and inviting. I'm personally not a fan of articles that start assert that a bunch of people are dumb. The author is going for a MMM vibe, but I think what makes his articles so successful is he criticizes behaviors instead of calling people dumb (usually).
- baxtr 6y ago
  Could you elaborate what you mean by MMM vibe?
  - JKCalhoun 6y ago
    Perhaps the Ponzi scheme? https://en.wikipedia.org/wiki/MMM_%28Ponzi_scheme_company%29 https://en.wikipedia.org/wiki/MMM_%28Ponzi_scheme_company%29
  - shoo 6y ago
    MMM is probably https://www.mrmoneymustache.com/ https://www.mrmoneymustache.com/
    - mywittyname 6y ago
      Yup, he's discussed this exact topic years ago, and presented it in a much better way. https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ https://www.mrmoneymustache.com/2012/01/13/the-shockingly-si... Notice how his post is titled "The Shockingly Simple Math Behind Early Retirement." It's pleasant, accessible, and it doesn't make you feel dumb for not knowing about it.
udev 6y ago
The author thinks new grad getting $250k/yr compensation in fifth year in job is an average outcome. I don't trust anyone who gets that wrong to tell me anything about the power of compounding or whatnot.
- ghaff 6y ago
  In fairness, per his link, he's claiming it it's an average comp at a handful of big tech companies. But that's something of a bubble and mostly (normally) doesn't come with remote anywhere (even US anywhere) options. It's a small percentage of developers and certainly people in tech more broadly. Yes, if someone lands a job at one of the big SV companies, lives frugally, and are fine with living frugally the rest of your life, you can probably retire/semi-retire pretty early if that's your preference.
  - ticmasta 6y ago
    This totally ignores the fact that a big reason salaries are so high in these markets is because cost of living is very high as well. Living on 25K a year wouldn't even cover your shared accommodation costs.
    - emit_time 6y ago
      Which is why you move when you retire.
      - legulere 6y ago
        Which is easy because you have no friends or family because you spent all time working.
    - easde 6y ago
      $25k/year is enough to live on even in the Bay Area if you have roommates and work at a big tech company with good benefits. It's not too hard to find a 3 bedroom house for $4,000/month in somewhere like Santa Clara. Split that 3 ways and that's only $1,300/month. Food and transportation is free during the week, leaving $700 / month for all other expenses (old car, food on weekends, some entertainment). Definitely would not be the most exciting life ever, but it's doable. Very effective if you want to quickly save $500k-1M for a home down payment or retire somewhere to a low COL area by the time you're 30.
JKCalhoun 6y ago
Didn't buy his responses to "What About Volatility?" and "What About Crashes?" He talked about averages of historical data that include crashes. Sure. But consider the window within the throes of a crash. Someone who always has and continues to spend a fixed amount every year will greatly diminish their capital during those lean years of the market. An exaggerated hypothetical to make the point: If they have $500K @ 5% and take out $32K a year, they can go over 30 years on their nest egg. If their nest egg falls to $100K due to a market crash, they have three years of their nest egg left.
- neogodless 6y ago
  Historically, over any 30 year span, has there been an 80% drop in market value, or a huge drop that was not preceded by a bull market? What exact sequence would have to occur for this hypothetical to have lost 80% in market value and be stuck in a market that doesn't recover quickly? By most historical averages, after 20 years the hypothetical portfolio has grown to $2 million inflation-adjusted, which means a drop to $100k or $250k would be a whopping 87.5%+ crash. On the flip side, a prolonged bear market in the first few years are the worst case scenario, though for most early retirees, the choices are to ignore the "fixed 5%" and/or seek additional income, if the sequence of returns really are dire enough.
  - gshdg 6y ago
    It doesn't matter whether the market stays up over 30 years. If it crashes at the wrong time (especially if that's after you've retired) and you have 100K left, you have only 3 years to recover, not 30. And even if the market recovers in 3 years, by then you're left with a fraction of your capital.
    - AstralStorm 6y ago
      Yet worse outcome is when you actually need the money (say, medical emergency or required big purchase) and you don't have it because market is lean or illiquid. And if you're old and retired, you will likely not get the needed loan. At the same moment, you don't have a job and if the emergency is big enough, you might not be able to get one. Even if you keep yourself updated to meet the needs of the market (which does cost money) others may not believe you. Face it, it's temporal gambling also known as a martingale. One with ok odds but still gambling. There are classes of assets that are less vulnerable to such downturns, but they have their own risks. (Mostly properties you live in and transportation you use.)
shoo 6y ago
Another presentation of the same idea is the Networthify early retirement calculator: https://networthify.com/calculator/earlyretirement?income=50000&initialBalance=0&expenses=20000&annualPct=5&withdrawalRate=4 https://networthify.com/calculator/earlyretirement?income=50... The behaviour of the system flips as you go from investment_income < annual_expenses to investment_income > annual_expenses , where investment_income = capital * return_on_capital . Before the transition, capital drains to zero over time, after the transition, capital grows to infinity over time. +/- the model being an crude approximation of reality.
- fred_is_fred 6y ago
  I like the concept there but it assumes that my expenses are fixed. Once the kids move out and my house is paid off, my expenses fall dramatically.
  - mdm12 6y ago
    https://engaging-data.com/fire-calculator/ https://engaging-data.com/fire-calculator/ provides separate inputs for retirement spending and current spending. It also supports different projection methods (fixed returns, Monte Carlo, etc.)
    - fred_is_fred 6y ago
      Thanks - this is exactly what I was looking for!
    - AstralStorm 6y ago
      Nice simulation. It lacks an estimate of chance of total failure given maximum predicted spending.
legerdemain 6y ago
My solution to improving my savings rate has been to swallow my pride and move into one of my parents' investment properties. As a bonus, I'm learning to be more handy by taking on moderate home maintenance tasks! Considering that most young people in tech have parents significantly wealthier than them, it's amazing to me that more people don't pursue this route and insist on throwing money away on rent. I know it's not as cool as the bohemian atmosphere of living with startup teammates in a shared house, but living rent-free in your family's spare home is the responsible and quick way to save!
- aeontech 6y ago
  I am not sure your assumption that most young people in tech have parents wealthy enough to own multiple properties is quite accurate... I agree that it’s a great idea, but I suspect many may not own even one property.
  - legerdemain 6y ago
    Here in Palo Alto, the parents of most of my peers have had long careers in medicine, law, finance/banking, or have international family wealth. There's always the odd person who comes from a more limited background, but for most of us, software engineering is actually a bit of a step down the traditional prestige ladder!
    - colinjoy 6y ago
      consider yourself part of a very exclusive and privileged minority, even if your local bubble might suggest otherwise.
      - fred_is_fred 6y ago
        +1 "Here in Palo Alto" is the definition of a privilege bubble.
    - taneq 6y ago
      Translation: Your entire social group is stonking rich. Which is nice but not really the target audience for the article.
st1x7 6y ago
> According to Dan Luu's conservative estimates a fresh grad at a big tech company can safely earn ~$500k post-tax in 5 years. The US median income post-tax is ~$25k, and investing in an index fund has historically earned ~5% average returns in the long run. So as a tech worker, if you can manage to live as 'frugally' as the average American, you can comfortably retire before 30. The $500k number in the post that he links to seems way off, the $25k median salary is also incorrect (it's closer to $40k).
- cjohnson318 6y ago
  Yeah, a 25k median national salary was probably true thirty years ago. Has anyone ever tried living cheaply in San Francisco? It's not easy, or cheap. If you plan on working 8-10 hours a day, after commuting an hour or more each way, after five years, you'll go insane.
  - emit_time 6y ago
    Move when you retire to a LCOL area.
  - scarmig 6y ago
    I managed ~$14k/year of consumption in the early 2010s in the East Bay, as a single guy. $25k/year in SF is entirely doable, especially if you have a partner. Even if not, so long as you're willing to have housemates, it's practical.
    - cjohnson318 6y ago
      I lived in East Palo Alto for a few years during that time. I was able to save some money and pay off some student loans. It was doable, but it wasn't great. Parking, traffic, garbage, noise, theft, and fleas were a constant thing.
- rtlfe 6y ago
  > the $25k median salary is also incorrect (it's closer to $40k). Not according to the government: > The U.S. Census Bureau lists the annual median personal income at $33,706 in 2018 33.7k pretax is closer to 25k than to 40k post tax. https://en.wikipedia.org/wiki/Personal_income_in_the_United_States https://en.wikipedia.org/wiki/Personal_income_in_the_United_...
baxtr 6y ago
I love frugality as a concept. I learned it from my parents who saved most of their earnings. We did not do any big holidays nor did we have anything brand new. All in all, we had a good life. However, frugality needs to be balanced with living a life worth living. Saving now for later assumes there is later, or even that well-being and health later are given. My mum said to me, shortly before she passed away: “Maybe we saved too much. Maybe we should have lived more.” That’s something I think of now when making decisions.
- serjester 6y ago
  My parents grew up in the Soviet Union and received a fairly large nest egg when my grandparents passed. Having saved their entires lives it was enough to buy a home. Well the Soviet Union collapsed, hyper inflation set in and they ended up buying a couple nice coats with the money. Hearing stories like that I've always thought the future needs to be heavily discounted. The present is certain, the future is not.
  - scarmig 6y ago
    Everyone should live their lives as if tomorrow may never come (after all, it might not!) I know a couple physically healthy, well-off people who would shoot themselves if the economy collapsed tomorrow and they lost everything.
    - cortesoft 6y ago
      If you do that, though, you are screwed when tomorrow does come, and you have no money, destroyed your body, and have not prepared at all.
      - cosmie 6y ago
        You and scarmig are both looking at the extremes. We're all screwed eventually, as death spares no life. But we never know when that day will come. So a more nuanced perspective would be to treat the now as your finale, and the future as your encore. That way, no matter when death knocks, you leave on a high note. If you put everything into your eventual encore, it's going to be one helluva encore if you get one, but incredibly bitter set piece leading up to it gets cut short, that chance never comes, and you realize just how flat your set piece ended up being. But it'll likewise be bitter if you pour everything into your finale, but end on a low note when you realize it's time for your encore and you've got nothing left for it. So avoid both extremes, and enjoy today while hedging for a potential tomorrow. As long as you keep that in mind, and consciously attempt to not invert it (i.e. maximize for a theoretical future by sacrificing your certain present), you'll generally be in a good place no matter when death knocks.
serjester 6y ago
Assuming you don't despise your career, I've never been a understood living like a monk to retire early (FIRE). A good developer can totally put away a net surplus year to year while living normally. Personally I've always found it far more enjoyable to be good at what you do, cherry pick jobs and take "mini-retirements" between them than sock away cash with the goal of never working again. To each his own, I suppose.
- brookside 6y ago
  The problem for me is that living normally in a dev job gives 15 total vacation/sick days a year. One can surely take mini-retirements between jobs, but realistically, it's harder to get salary bumps when you NEED a job and you don't have the luxury of choosing to stay at your current spot if an offer isn't an increase. Also one normally needs to stay at jobs for two years or otherwise can look like a risky hire. Five years of semi-monastic living with a good dev salary can be enough to buy freedom to work as little or as much as one chooses for the rest of life.
  - AstralStorm 6y ago
    You mean at FAANG in the USA. Sorry, but that is not the general outcome for a software developer.
  - adrianN 6y ago
    Try moving to Europe. Pay is a bit lower, but you get a lot more vacation.
  - proverbialbunny 6y ago
    In tech you look bad if you've worked under a year at a company. It's common for employees to leave at exactly 12 months. Likewise, it looks bad if you take more than a year off between jobs.
- neogodless 6y ago
  Where did you read that you should live like a monk? The closest I've seen would be Early Retirement Extreme. He's still not exactly about deprivation, but rather self-sufficiency. And he targets lower income levels than a competent software developer. Most blogs I've read have focused on enjoying your life without being wasteful with your dollars. It's easy to spend money that doesn't return nearly what you might guess or hope when you click that buy button. Just a small effort can change your thought process and better optimize your use of money and improve your lifestyle. While many don't despise their career, everyone prefers having complete say over how they spend their time to having to do what a boss demands. If you still prefer working, that's great, but if you don't have a choice about it, you're likely less happy about that.
vsskanth 6y ago
I wonder how this changes with kids and healthcare costs
- UncleOxidant 6y ago
  Healthcare costs in the US are problematic for early retirement - even if "early" is in your 50s. The ACA actually made things a lot better if you can keep your annual income under certain thresholds. But with the possible demise of the ACA being able to control health insurance costs could become problematic. The Supreme Court is going to rule on it next year - arguments start in November and it looks like they'll be getting another anti-ACA justice soon so this seems like a likely outcome. This kind of uncertainty is difficult to budget for.
  - vsskanth 6y ago
    Yeah this is what I was looking for. Without some kind of health insurance no amount of money is enough to retire.
    - UncleOxidant 6y ago
      Indeed. And if health insurance goes back to excluding pre-existing conditions which is likely to happen post-ACA it's going to leave most people wide open to risk. The other thing that likely would happen in a post-ACA context would be that there will be insurance policies that don't cover various conditions like, say, cancer treatment - it might look like you're getting a fairly decent premium, but you'll need to read the fine print for what's excluded. Yes, Trump says his "plan" will cover pre-existing conditions, but no one has ever seen this wonderful plan that costs less than ACA plans and also covers pre-existing conditions.
- stkdump 6y ago
  In Germany healthcare costs depend on your income. If you have no income (investment returns don't count against that), you can get monthly government payments to cover a moderate lifestyle. But if you have no labor income but sit on some non-negligable net worth, you don't qualify. That means FIRE is a lot more expensive, unless you (or your spouse) takes at least a part time job to get health care covered cheaply, which is actually not that uncommon.
jojobas 6y ago
Lev Landau was once caught counting the bills of just collected salary (traditionally in cash sin USSR). Confronted by one of his disciples, whom he always taught to evaluate by order of magnitude, he responded "money's worth is exponential".
m0llusk 6y ago
Saving was useful until my career ended with everything about my profession changed. Resilient savings is a great idea until it fails. Then adaptation and improvisation perform better.
- akeck 6y ago
  This is a failure mode I sometimes fear - a relatively quick complete industry shift that renders all my marketable skills moot. Can you talk more about what happened in your case?
  - AstralStorm 6y ago
    Skills can be gained. The bigger more of failure is a health reason preventing you from working most everywhere or in a huge chunk of work. Calculate the summed rates of cancer, heart attack with complications, blindness, deafness and maiming accidents. This makes stable FIRE risky, and the solution to limit exposure to these risks is to save even more, but invest a bit less, and ensure you get the illiquid assets needed for long term survival as early as you can.
CGamesPlay 6y ago
> In the tech industry we have some very loud voices arguing that if you desire autonomy or leverage, the best path forwards is to start a VC-backed startup. Maybe it's because I automatically tune out voices which are obviously wrong, but after 9 years in SV I can't claim to have ever heard anyone say this. All of the advice I've ever seen targeted at fresh entrants boils down to the "earn vs learn" dichotomy, which squarely puts "earn" away from VC-backed startups.
eVeechu7 6y ago
The author's observation that the effect of savings depends on the earnings rate is true, but if inflation outstrips the rate of earnings unfortunately it is still true.
AstralStorm 6y ago
Unfortunately, this reasoning relies on the assumption compounding interest is reliable in the long term. Over a length of lifetime the assumption does not hold true, there are many ways to wipe out. Moreover, it relies on another assumption that you will be able to pull the investment when you need a lot of cash. It's easy to sip, quite hard sometimes to liquidate a big one, depending on the kind of assets you invested in. On the other hand, the risk is much lower than getting a startup running... There is a point where marginal extra dollar does not get you more happiness. But most people are not at that point, so this is advocating trading current happiness for future when you will be too old to enjoy the money. So, the right choice is to save enough to meet your current goals and live a frugal lifetime later - with considerations such as costs of healthcare.
whatever1 6y ago
Why everyone in the US is betting that the stock market will always go on average up ? This has been proven wrong by so many European indices. And yet the whole US pension system is based on this casino. I really don’t get it. Elderly People are getting robbed of their life savings during recessions and nobody is held responsible.
- wraptile 6y ago
  > Why everyone in the US is betting that the stock market will always go on average up? Shouldn't it? I'm not an economist but if you think about it: as we become more advanced we create more resources with less work. Stock market would be just one of many way to distrubute that extra efficiency to the society. Unless there's a crisis we should never produce less resources with more work. Of course this is much more complicated than I make it out to be but my point is that it's relatively safe to assume that stock market should go up on average long term.
  - whatever1 6y ago
    If your 401k was in the average European stock market since the 2000, today you would have the same money minus the inflation. The GDP of Europe has increased the last 20 years, yet the stock market did not.
    - occamrazor 6y ago
      Which index? The DAX is above 12000 now and never exceeded 8000 around 2000. And this does not even include dividends.
      - whatever1 6y ago
        Check the stoxx 50 index to get an average view of the european industry. It has been flat for decades. If you go to particular countries the image is much much worse. For example if you had your money in the Italian stock market since 2000, by now you would have less than half (inflation not accounted).
valleyjo 6y ago
I learned in 2020 that if you want to do something, you should do it. I’ve had a lot of lost opportunities in different categories. Saving money is important to me. But so is doing fun things and a lot of times those two are opposed. Like many things it’s about the trade offs.
foxhop 6y ago
If you think, wow I could retire really soon if I put this to practice, the truth is, yes, yes you could. If you want to learn more search FIRE (financial independence early retirement) or message me on mastodon (link on my website) My savings rate is currently 68% and I do not live an impoverished life style. Look up the "surprisingly simple math behind early retirement".
legulere 6y ago
This assumes you can extrapolate the interest of ETFs. There are some reasons why it might not: - Index ETFs are becoming a huge part of the market maybe leading to unexpected results. - We’re in a completely different situation of monetary policy. Japan is the most similar we can compare to and there it lead to a stagnating stock market. - if the Fed decides to change its monetary policy in some years there will be significantly less money available for the stock market - the economic position of the US is changing dramatically compared with the last 50 years.
imtringued 6y ago
>Effectively, including growth in the model moves the asymptote to the right - your runway goes up to infinity as your spending approaches some percentage of your total savings, rather than as it approaches zero. This ignores that you cannot ever reach zero as a normal citizen, unless someone else is paying for you. Even if you live with room mates, you're going to spend some non zero amount on living expenses. Let's say the your post tax income is $3000. Normal people spend half of it on living expenses. Marginally frugal people get away with paying $1000 with little sacrifice. Very fugal people spend $800 by sacrificing everything nonessential and living with room mates. Hyper fugal people spend $500 by sacrificing everything nonessential and lots of essentials. The step after that isn't frugality, it's homelessness (someone else is paying for you).
- shoo 6y ago
  You're entirely correct about diminishing returns & difficulty attempting to drive expenses close to zero, but note that the author of the post was saying that it isn't necessary for expenses to go to zero. Expenses just need to be sufficiently small (but not arbitrarily small) compared to the percentage of total savings -- I'll interpret "total savings" as the accumulated capital that we are able to invest to generate a return. As you approach a certain critical ratio of expenses / invested capital your runway of how long you can live off investment returns & capital goes to infinity. You can approach that ratio in two ways: by reducing expenses or increasing the amount of invested capital. E.g. suppose you have expenses of X / year. Suppose you have accumulated capital worth K that generates a real investment return of K * r every year. If K * r >= X then you can operate indefinitely with investment returns covering all expenses, i.e. the "infinite runway". We haven't talked about the expenses X being zero or frugal. Your expenses X could be lavish, but they just need to be no greater in size than K * r . A plausible value of r corresponding to capital invested in the stock market with a very small allocation of bonds might be 0.035 -- 0.04 for a 3.5% ... 4% annual real return. So if your annual expenses are X then to cross the threshold into infinite runway you need to have capital invested worth at least K >= K* = X / r , that is K >= X / 0.04 ... X / 0.035 = 25X ... 28.6X .
- ghaff 6y ago
  Even a house you own is probably going to be a good $10K/year after property taxes, insurance, utilities, and even modest maintenance. A condo might be less but condo fees can be significant too.

113 points by luu 6y ago

wenc 6y ago

I think my take-away is that a dollar consistently removed from one's budget and invested will compound and hence there exists a nonlinear relationship between budget adjustments and runway. It's definitely a relationship that people desiring financial independence can exploit. However, there's also time value to different classes of purchases. For instance, spending money acquiring certain skills early in life allows time for those skills to compound while the same investment later in life may have no utility. The commonly cited example is an MBA: getting an MBA in early career provides more leverage than if it was obtained in mid career or later. A late career MBA in most cases has vastly diminished signalling/credentialing value. Frugality (in early life) that optimizes for the date of financial independence (and runway) is not a bad idea, but seems to me that employed in isolation, it may increase the chances of landing on a local optimum when other more favorable optima may exist. People often talk about time value of money... but there's also the time value of time/age.

jasonzemos 6y ago
> A late career MBA in most cases has vastly diminished signalling/credentialing value. That anecdote seems to insinuate the essence of an MBA offers no substantive value, nor does even the achievement of the accreditation itself. It is the timing of the latter which projects the value. Is that a really low or a really high bar?
- eachro 6y ago
  A large part of the MBA is access to a network of rich/ambitious/well-connected people. The earlier you have your MBA, the more time you have to take advantage of it.
- wenc 6y ago
  This is reasoning that I've heard from MBAs themselves (I don't have an MBA myself, so would welcome any thoughts from actual MBA holders). The value of an MBA is in signaling, networking and knowledge, roughly in that order. In late career, assuming you're doing well-enough that you'd want to pursue an MBA, you'd already have amassed quite a bit of business knowledge from the school of hard knocks, that likely exceeds the theory b-schools can teach (although they can definitely still fill in knowledge gaps say in finance or strategy etc.). The marginal value of the theory is even less if you majored in business in college -- the difference between a BBA and an MBA in terms of coursework is generally not substantial. In late career, your experience and success (in different roles) is a generally stronger signal than credentials. In late career, you'd have developed a fairly good network unless you're looking to pivot to a totally different field or industry.
  - ghaff 6y ago
    At the time I got mine, it was sort of a necessary stamp to switch from the engineering I was doing in the oil business to a different role in the computer business. But a long time ago. So maybe signaling, definitely credentialing, some knowledge. For those looking to switch from fairly pedestrian post-liberal arts jobs, the MBA was huge in many cases. The networking effect has never been big for me. I'm fine with having gotten an MBA. Degrees like the one I got were less expensive in those days and it landed me in a good place. But TBH, my undergrad (from a good school) has probably opened more doors than my MBA ever did. (Had I gone into finance, the situation might have been different.)
  - maroonblazer 6y ago
    I got my MBA mid-career but my undergrad was in music and I switched careers 10 yrs out of college. So, while I'd amassed a healthy amount of business knowledge, the MBA taught me things I'd not learned on the job. That said, for many in my MBA cohort who had majored in business in undergrad, most I talked to said they weren't learning anything they didn't already know, save perhaps how to use their financial calculators in novel ways. Lends credence to the 'signaling' of an MBA, more than anything else.
- toby 6y ago
  Whether it's for the essence or the achievement of a particular degree, getting a better job earlier in life has substantial effects on lifetime earnings. Whatever the credential gets you, for whatever reason, it's advantageous to have more time to take advantage of it. The parent could have used MD (there are some people who switch careers to become doctors in their 30s) and it would be the same... just having a chance to have been a doctor for longer will put you ahead.
- ghaff 6y ago
  I'm not sure the comment is really fair but, in general, unless a company is paying for an Exec MBA program for a mid-level exec being groomed for higher level, a mid/late career MBA doesn't make a lot of sense in opportunity cost, etc. Even if you take out the signaling/credentialing value generally, absent someone trying to make a real career shift (which becomes more difficult as you get older), it's not clear what an MBA--rather than maybe a couple of focused classes--buy you after some point. (But, for that matter, a PhD or other new degree probably buys you less too at some point.)
- deleted 6y ago
  [deleted]

mywittyname 6y ago

> Most people have a mental model of budgeting which is roughly linear. If you spend half as much money, your money will last twice as long. As you approach zero spending, your runway goes up to infinity. Well sure, but if you have investments, then it's not zero spending you need to approach, but your annual investment returns...Which is basically what the rest of the page discusses. The author is basically asserting that most people who budget assume a 0% rate of return on their investment. But since that's a nonsensical assertion, they instead rearrange the logic a bit to make a functionally identical statement which sounds less obviously flawed. The content in the article is good, but it could stand to have the "most people think...but they are wrong" section replaced with something more friendly and inviting. I'm personally not a fan of articles that start assert that a bunch of people are dumb. The author is going for a MMM vibe, but I think what makes his articles so successful is he criticizes behaviors instead of calling people dumb (usually).

baxtr 6y ago
Could you elaborate what you mean by MMM vibe?
- JKCalhoun 6y ago
  Perhaps the Ponzi scheme? https://en.wikipedia.org/wiki/MMM_%28Ponzi_scheme_company%29 https://en.wikipedia.org/wiki/MMM_%28Ponzi_scheme_company%29
- shoo 6y ago
  MMM is probably https://www.mrmoneymustache.com/ https://www.mrmoneymustache.com/
  - mywittyname 6y ago
    Yup, he's discussed this exact topic years ago, and presented it in a much better way. https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ https://www.mrmoneymustache.com/2012/01/13/the-shockingly-si... Notice how his post is titled "The Shockingly Simple Math Behind Early Retirement." It's pleasant, accessible, and it doesn't make you feel dumb for not knowing about it.

udev 6y ago

The author thinks new grad getting $250k/yr compensation in fifth year in job is an average outcome. I don't trust anyone who gets that wrong to tell me anything about the power of compounding or whatnot.

ghaff 6y ago
In fairness, per his link, he's claiming it it's an average comp at a handful of big tech companies. But that's something of a bubble and mostly (normally) doesn't come with remote anywhere (even US anywhere) options. It's a small percentage of developers and certainly people in tech more broadly. Yes, if someone lands a job at one of the big SV companies, lives frugally, and are fine with living frugally the rest of your life, you can probably retire/semi-retire pretty early if that's your preference.
- ticmasta 6y ago
  This totally ignores the fact that a big reason salaries are so high in these markets is because cost of living is very high as well. Living on 25K a year wouldn't even cover your shared accommodation costs.
  - emit_time 6y ago
    Which is why you move when you retire.
    - legulere 6y ago
      Which is easy because you have no friends or family because you spent all time working.
  - easde 6y ago
    $25k/year is enough to live on even in the Bay Area if you have roommates and work at a big tech company with good benefits. It's not too hard to find a 3 bedroom house for $4,000/month in somewhere like Santa Clara. Split that 3 ways and that's only $1,300/month. Food and transportation is free during the week, leaving $700 / month for all other expenses (old car, food on weekends, some entertainment). Definitely would not be the most exciting life ever, but it's doable. Very effective if you want to quickly save $500k-1M for a home down payment or retire somewhere to a low COL area by the time you're 30.

JKCalhoun 6y ago

Didn't buy his responses to "What About Volatility?" and "What About Crashes?" He talked about averages of historical data that include crashes. Sure. But consider the window within the throes of a crash. Someone who always has and continues to spend a fixed amount every year will greatly diminish their capital during those lean years of the market. An exaggerated hypothetical to make the point: If they have $500K @ 5% and take out $32K a year, they can go over 30 years on their nest egg. If their nest egg falls to $100K due to a market crash, they have three years of their nest egg left.

neogodless 6y ago
Historically, over any 30 year span, has there been an 80% drop in market value, or a huge drop that was not preceded by a bull market? What exact sequence would have to occur for this hypothetical to have lost 80% in market value and be stuck in a market that doesn't recover quickly? By most historical averages, after 20 years the hypothetical portfolio has grown to $2 million inflation-adjusted, which means a drop to $100k or $250k would be a whopping 87.5%+ crash. On the flip side, a prolonged bear market in the first few years are the worst case scenario, though for most early retirees, the choices are to ignore the "fixed 5%" and/or seek additional income, if the sequence of returns really are dire enough.
- gshdg 6y ago
  It doesn't matter whether the market stays up over 30 years. If it crashes at the wrong time (especially if that's after you've retired) and you have 100K left, you have only 3 years to recover, not 30. And even if the market recovers in 3 years, by then you're left with a fraction of your capital.
  - AstralStorm 6y ago
    Yet worse outcome is when you actually need the money (say, medical emergency or required big purchase) and you don't have it because market is lean or illiquid. And if you're old and retired, you will likely not get the needed loan. At the same moment, you don't have a job and if the emergency is big enough, you might not be able to get one. Even if you keep yourself updated to meet the needs of the market (which does cost money) others may not believe you. Face it, it's temporal gambling also known as a martingale. One with ok odds but still gambling. There are classes of assets that are less vulnerable to such downturns, but they have their own risks. (Mostly properties you live in and transportation you use.)

shoo 6y ago

Another presentation of the same idea is the Networthify early retirement calculator: https://networthify.com/calculator/earlyretirement?income=50000&initialBalance=0&expenses=20000&annualPct=5&withdrawalRate=4 https://networthify.com/calculator/earlyretirement?income=50... The behaviour of the system flips as you go from investment_income < annual_expenses to investment_income > annual_expenses , where investment_income = capital * return_on_capital . Before the transition, capital drains to zero over time, after the transition, capital grows to infinity over time. +/- the model being an crude approximation of reality.

fred_is_fred 6y ago
I like the concept there but it assumes that my expenses are fixed. Once the kids move out and my house is paid off, my expenses fall dramatically.
- mdm12 6y ago
  https://engaging-data.com/fire-calculator/ https://engaging-data.com/fire-calculator/ provides separate inputs for retirement spending and current spending. It also supports different projection methods (fixed returns, Monte Carlo, etc.)
  - fred_is_fred 6y ago
    Thanks - this is exactly what I was looking for!
  - AstralStorm 6y ago
    Nice simulation. It lacks an estimate of chance of total failure given maximum predicted spending.

legerdemain 6y ago

My solution to improving my savings rate has been to swallow my pride and move into one of my parents' investment properties. As a bonus, I'm learning to be more handy by taking on moderate home maintenance tasks! Considering that most young people in tech have parents significantly wealthier than them, it's amazing to me that more people don't pursue this route and insist on throwing money away on rent. I know it's not as cool as the bohemian atmosphere of living with startup teammates in a shared house, but living rent-free in your family's spare home is the responsible and quick way to save!

aeontech 6y ago
I am not sure your assumption that most young people in tech have parents wealthy enough to own multiple properties is quite accurate... I agree that it’s a great idea, but I suspect many may not own even one property.
- legerdemain 6y ago
  Here in Palo Alto, the parents of most of my peers have had long careers in medicine, law, finance/banking, or have international family wealth. There's always the odd person who comes from a more limited background, but for most of us, software engineering is actually a bit of a step down the traditional prestige ladder!
  - colinjoy 6y ago
    consider yourself part of a very exclusive and privileged minority, even if your local bubble might suggest otherwise.
    - fred_is_fred 6y ago
      +1 "Here in Palo Alto" is the definition of a privilege bubble.
  - taneq 6y ago
    Translation: Your entire social group is stonking rich. Which is nice but not really the target audience for the article.

st1x7 6y ago

> According to Dan Luu's conservative estimates a fresh grad at a big tech company can safely earn ~$500k post-tax in 5 years. The US median income post-tax is ~$25k, and investing in an index fund has historically earned ~5% average returns in the long run. So as a tech worker, if you can manage to live as 'frugally' as the average American, you can comfortably retire before 30. The $500k number in the post that he links to seems way off, the $25k median salary is also incorrect (it's closer to $40k).

cjohnson318 6y ago
Yeah, a 25k median national salary was probably true thirty years ago. Has anyone ever tried living cheaply in San Francisco? It's not easy, or cheap. If you plan on working 8-10 hours a day, after commuting an hour or more each way, after five years, you'll go insane.
- emit_time 6y ago
  Move when you retire to a LCOL area.
- scarmig 6y ago
  I managed ~$14k/year of consumption in the early 2010s in the East Bay, as a single guy. $25k/year in SF is entirely doable, especially if you have a partner. Even if not, so long as you're willing to have housemates, it's practical.
  - cjohnson318 6y ago
    I lived in East Palo Alto for a few years during that time. I was able to save some money and pay off some student loans. It was doable, but it wasn't great. Parking, traffic, garbage, noise, theft, and fleas were a constant thing.
rtlfe 6y ago
> the $25k median salary is also incorrect (it's closer to $40k). Not according to the government: > The U.S. Census Bureau lists the annual median personal income at $33,706 in 2018 33.7k pretax is closer to 25k than to 40k post tax. https://en.wikipedia.org/wiki/Personal_income_in_the_United_States https://en.wikipedia.org/wiki/Personal_income_in_the_United_...

baxtr 6y ago

I love frugality as a concept. I learned it from my parents who saved most of their earnings. We did not do any big holidays nor did we have anything brand new. All in all, we had a good life. However, frugality needs to be balanced with living a life worth living. Saving now for later assumes there is later, or even that well-being and health later are given. My mum said to me, shortly before she passed away: “Maybe we saved too much. Maybe we should have lived more.” That’s something I think of now when making decisions.

serjester 6y ago
My parents grew up in the Soviet Union and received a fairly large nest egg when my grandparents passed. Having saved their entires lives it was enough to buy a home. Well the Soviet Union collapsed, hyper inflation set in and they ended up buying a couple nice coats with the money. Hearing stories like that I've always thought the future needs to be heavily discounted. The present is certain, the future is not.
- scarmig 6y ago
  Everyone should live their lives as if tomorrow may never come (after all, it might not!) I know a couple physically healthy, well-off people who would shoot themselves if the economy collapsed tomorrow and they lost everything.
  - cortesoft 6y ago
    If you do that, though, you are screwed when tomorrow does come, and you have no money, destroyed your body, and have not prepared at all.
    - cosmie 6y ago
      You and scarmig are both looking at the extremes. We're all screwed eventually, as death spares no life. But we never know when that day will come. So a more nuanced perspective would be to treat the now as your finale, and the future as your encore. That way, no matter when death knocks, you leave on a high note. If you put everything into your eventual encore, it's going to be one helluva encore if you get one, but incredibly bitter set piece leading up to it gets cut short, that chance never comes, and you realize just how flat your set piece ended up being. But it'll likewise be bitter if you pour everything into your finale, but end on a low note when you realize it's time for your encore and you've got nothing left for it. So avoid both extremes, and enjoy today while hedging for a potential tomorrow. As long as you keep that in mind, and consciously attempt to not invert it (i.e. maximize for a theoretical future by sacrificing your certain present), you'll generally be in a good place no matter when death knocks.

serjester 6y ago

Assuming you don't despise your career, I've never been a understood living like a monk to retire early (FIRE). A good developer can totally put away a net surplus year to year while living normally. Personally I've always found it far more enjoyable to be good at what you do, cherry pick jobs and take "mini-retirements" between them than sock away cash with the goal of never working again. To each his own, I suppose.

brookside 6y ago
The problem for me is that living normally in a dev job gives 15 total vacation/sick days a year. One can surely take mini-retirements between jobs, but realistically, it's harder to get salary bumps when you NEED a job and you don't have the luxury of choosing to stay at your current spot if an offer isn't an increase. Also one normally needs to stay at jobs for two years or otherwise can look like a risky hire. Five years of semi-monastic living with a good dev salary can be enough to buy freedom to work as little or as much as one chooses for the rest of life.
- AstralStorm 6y ago
  You mean at FAANG in the USA. Sorry, but that is not the general outcome for a software developer.
- adrianN 6y ago
  Try moving to Europe. Pay is a bit lower, but you get a lot more vacation.
- proverbialbunny 6y ago
  In tech you look bad if you've worked under a year at a company. It's common for employees to leave at exactly 12 months. Likewise, it looks bad if you take more than a year off between jobs.
neogodless 6y ago
Where did you read that you should live like a monk? The closest I've seen would be Early Retirement Extreme. He's still not exactly about deprivation, but rather self-sufficiency. And he targets lower income levels than a competent software developer. Most blogs I've read have focused on enjoying your life without being wasteful with your dollars. It's easy to spend money that doesn't return nearly what you might guess or hope when you click that buy button. Just a small effort can change your thought process and better optimize your use of money and improve your lifestyle. While many don't despise their career, everyone prefers having complete say over how they spend their time to having to do what a boss demands. If you still prefer working, that's great, but if you don't have a choice about it, you're likely less happy about that.

vsskanth 6y ago

I wonder how this changes with kids and healthcare costs

UncleOxidant 6y ago
Healthcare costs in the US are problematic for early retirement - even if "early" is in your 50s. The ACA actually made things a lot better if you can keep your annual income under certain thresholds. But with the possible demise of the ACA being able to control health insurance costs could become problematic. The Supreme Court is going to rule on it next year - arguments start in November and it looks like they'll be getting another anti-ACA justice soon so this seems like a likely outcome. This kind of uncertainty is difficult to budget for.
- vsskanth 6y ago
  Yeah this is what I was looking for. Without some kind of health insurance no amount of money is enough to retire.
  - UncleOxidant 6y ago
    Indeed. And if health insurance goes back to excluding pre-existing conditions which is likely to happen post-ACA it's going to leave most people wide open to risk. The other thing that likely would happen in a post-ACA context would be that there will be insurance policies that don't cover various conditions like, say, cancer treatment - it might look like you're getting a fairly decent premium, but you'll need to read the fine print for what's excluded. Yes, Trump says his "plan" will cover pre-existing conditions, but no one has ever seen this wonderful plan that costs less than ACA plans and also covers pre-existing conditions.
stkdump 6y ago
In Germany healthcare costs depend on your income. If you have no income (investment returns don't count against that), you can get monthly government payments to cover a moderate lifestyle. But if you have no labor income but sit on some non-negligable net worth, you don't qualify. That means FIRE is a lot more expensive, unless you (or your spouse) takes at least a part time job to get health care covered cheaply, which is actually not that uncommon.

jojobas 6y ago

Lev Landau was once caught counting the bills of just collected salary (traditionally in cash sin USSR). Confronted by one of his disciples, whom he always taught to evaluate by order of magnitude, he responded "money's worth is exponential".

m0llusk 6y ago

Saving was useful until my career ended with everything about my profession changed. Resilient savings is a great idea until it fails. Then adaptation and improvisation perform better.

akeck 6y ago
This is a failure mode I sometimes fear - a relatively quick complete industry shift that renders all my marketable skills moot. Can you talk more about what happened in your case?
- AstralStorm 6y ago
  Skills can be gained. The bigger more of failure is a health reason preventing you from working most everywhere or in a huge chunk of work. Calculate the summed rates of cancer, heart attack with complications, blindness, deafness and maiming accidents. This makes stable FIRE risky, and the solution to limit exposure to these risks is to save even more, but invest a bit less, and ensure you get the illiquid assets needed for long term survival as early as you can.

CGamesPlay 6y ago

> In the tech industry we have some very loud voices arguing that if you desire autonomy or leverage, the best path forwards is to start a VC-backed startup. Maybe it's because I automatically tune out voices which are obviously wrong, but after 9 years in SV I can't claim to have ever heard anyone say this. All of the advice I've ever seen targeted at fresh entrants boils down to the "earn vs learn" dichotomy, which squarely puts "earn" away from VC-backed startups.

eVeechu7 6y ago

The author's observation that the effect of savings depends on the earnings rate is true, but if inflation outstrips the rate of earnings unfortunately it is still true.

AstralStorm 6y ago

Unfortunately, this reasoning relies on the assumption compounding interest is reliable in the long term. Over a length of lifetime the assumption does not hold true, there are many ways to wipe out. Moreover, it relies on another assumption that you will be able to pull the investment when you need a lot of cash. It's easy to sip, quite hard sometimes to liquidate a big one, depending on the kind of assets you invested in. On the other hand, the risk is much lower than getting a startup running... There is a point where marginal extra dollar does not get you more happiness. But most people are not at that point, so this is advocating trading current happiness for future when you will be too old to enjoy the money. So, the right choice is to save enough to meet your current goals and live a frugal lifetime later - with considerations such as costs of healthcare.

whatever1 6y ago

Why everyone in the US is betting that the stock market will always go on average up ? This has been proven wrong by so many European indices. And yet the whole US pension system is based on this casino. I really don’t get it. Elderly People are getting robbed of their life savings during recessions and nobody is held responsible.

wraptile 6y ago
> Why everyone in the US is betting that the stock market will always go on average up? Shouldn't it? I'm not an economist but if you think about it: as we become more advanced we create more resources with less work. Stock market would be just one of many way to distrubute that extra efficiency to the society. Unless there's a crisis we should never produce less resources with more work. Of course this is much more complicated than I make it out to be but my point is that it's relatively safe to assume that stock market should go up on average long term.
- whatever1 6y ago
  If your 401k was in the average European stock market since the 2000, today you would have the same money minus the inflation. The GDP of Europe has increased the last 20 years, yet the stock market did not.
  - occamrazor 6y ago
    Which index? The DAX is above 12000 now and never exceeded 8000 around 2000. And this does not even include dividends.
    - whatever1 6y ago
      Check the stoxx 50 index to get an average view of the european industry. It has been flat for decades. If you go to particular countries the image is much much worse. For example if you had your money in the Italian stock market since 2000, by now you would have less than half (inflation not accounted).

valleyjo 6y ago

I learned in 2020 that if you want to do something, you should do it. I’ve had a lot of lost opportunities in different categories. Saving money is important to me. But so is doing fun things and a lot of times those two are opposed. Like many things it’s about the trade offs.

foxhop 6y ago

If you think, wow I could retire really soon if I put this to practice, the truth is, yes, yes you could. If you want to learn more search FIRE (financial independence early retirement) or message me on mastodon (link on my website) My savings rate is currently 68% and I do not live an impoverished life style. Look up the "surprisingly simple math behind early retirement".

legulere 6y ago

This assumes you can extrapolate the interest of ETFs. There are some reasons why it might not: - Index ETFs are becoming a huge part of the market maybe leading to unexpected results. - We’re in a completely different situation of monetary policy. Japan is the most similar we can compare to and there it lead to a stagnating stock market. - if the Fed decides to change its monetary policy in some years there will be significantly less money available for the stock market - the economic position of the US is changing dramatically compared with the last 50 years.

imtringued 6y ago

>Effectively, including growth in the model moves the asymptote to the right - your runway goes up to infinity as your spending approaches some percentage of your total savings, rather than as it approaches zero. This ignores that you cannot ever reach zero as a normal citizen, unless someone else is paying for you. Even if you live with room mates, you're going to spend some non zero amount on living expenses. Let's say the your post tax income is $3000. Normal people spend half of it on living expenses. Marginally frugal people get away with paying $1000 with little sacrifice. Very fugal people spend $800 by sacrificing everything nonessential and living with room mates. Hyper fugal people spend $500 by sacrificing everything nonessential and lots of essentials. The step after that isn't frugality, it's homelessness (someone else is paying for you).

shoo 6y ago
You're entirely correct about diminishing returns & difficulty attempting to drive expenses close to zero, but note that the author of the post was saying that it isn't necessary for expenses to go to zero. Expenses just need to be sufficiently small (but not arbitrarily small) compared to the percentage of total savings -- I'll interpret "total savings" as the accumulated capital that we are able to invest to generate a return. As you approach a certain critical ratio of expenses / invested capital your runway of how long you can live off investment returns & capital goes to infinity. You can approach that ratio in two ways: by reducing expenses or increasing the amount of invested capital. E.g. suppose you have expenses of X / year. Suppose you have accumulated capital worth K that generates a real investment return of K * r every year. If K * r >= X then you can operate indefinitely with investment returns covering all expenses, i.e. the "infinite runway". We haven't talked about the expenses X being zero or frugal. Your expenses X could be lavish, but they just need to be no greater in size than K * r . A plausible value of r corresponding to capital invested in the stock market with a very small allocation of bonds might be 0.035 -- 0.04 for a 3.5% ... 4% annual real return. So if your annual expenses are X then to cross the threshold into infinite runway you need to have capital invested worth at least K >= K* = X / r , that is K >= X / 0.04 ... X / 0.035 = 25X ... 28.6X .
ghaff 6y ago
Even a house you own is probably going to be a good $10K/year after property taxes, insurance, utilities, and even modest maintenance. A condo might be less but condo fees can be significant too.