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No. You should accumulate them with a goal towards securing your future, and living free.
Then I might as well be poor. I am one of those guys. My family income is in the mid 5 figures. My 1950s house is 2200sf, the average age of my three vehicles is 19 years old. My family frequently shops at thrift stores. I try to save at least 10% of each paycheck. More when I can.
No, I'm not rich. But I am under forty, with mid six figures in the bank, and no debt.
Why do I choose to live significantly under my means?
1. Financial security: What would you do if your household income decreased by 25%? Mine did, and I survived with NO change in lifestyle. What about an unexpected health issue? I had one. Again, I navigated it with minimal disruption. If you don't save how do you pay for your kids braces, education, etc? What about your eventual retirement and old age?
2. The possibility of early retirement in the future, when I can live off of a 4% annual withdrawal rate, without reducing principal.
3. The feeling of freedom I get by being able to do what I want, when I want, and not being tied down to my employer if it becomes intolerable.
You're definitely on the right track. I too have lived like that and am taking an early, really early retirement next year. I have always lived below my means. Does that make me poor..no way. I just made more money then I needed to live happily. And now I can continue to live that way without having to work for someone else.
Deep down..I'm a blue collar person with a white collar job.
How much you save in relation to your paycheck and the size of your house are not meaningful indicators. Also, how exactly is three cars modest? One car is modest. There are many 1950's ~2000 sf homes in, for example the bay area, that are millions.
Anyhow, I'm talking about people with a lot of money that don't utilize it, not people with very modest salaries that live very modestly. From the sounds of it your lifestyle matches your income, spending an extra 10% would not dramatically change your lifestyle.
Saving 10% of your income is not living "significantly" under your means.
We could go round and round trying to come up with examples. It is very contextual. A modest house in one area, may be a mansion in another, for instance.
How much you save in relation to your paycheck is a very meaningful indicator. You can't put money in the bank without spending less than you make. You can't put significant money in the bank without saving significantly.
I agree that saving 10% isn't "significantly" below ones means. I try to save much more. 10% is a minimum.
True. But one needs to scrimp and save in order to get to the point where they can live off that 4% SWR. Further, once they get to their desired SWR they may need to continue their thrift to maintain it. Thus the need to not look rich, while actually having lots in the bank. It is rare to spend like you are rich while actually being rich. It is all about cashflow.
If you live the lifestyle before then it will not be difficult to maintain after.
People who live for the moment and then panic are the ones who will be shocked when they cannot live that way after retirement.
I save at least 10%. Sometimes much more, was about 25% before having kids. Started early, so compound interest has worked strongly in my favor.
That still doesn't add up, even with a decent return of 6~7% you should only have around $200k.
Quote:
Originally Posted by Keim
True. But one needs to scrimp and save in order to get to the point where they can live off that 4% SWR. Further, once they get to their desired SWR they may need to continue their thrift to maintain it. Thus the need to not look rich, while actually having lots in the bank.
This is all relative to one's income, a family making $500k a year can spend far more money than you while also saving far more than you. Even if this family saved 50% of their income, they'd still be able to spend a lot of money.
Quote:
Originally Posted by Keim
It is rare to spend like you are rich while actually being rich.
No its not, you guys ignore the income side of things. As above example, someone with a big income can both spend big and save big. The frugality group tends to be low income, it apparently makes them feel better about their situation to assume that anybody that drives a Mercedes, eats out a lot, etc is loaded up with debt and in a poor financial situation.
It is the "frugal millionaire" that is rare, these are people that have done well for whatever reason and haven't changed their spending habits to match their income/wealth. This doesn't happen often..
That still doesn't add up, even with a decent return of 6~7% you should only have around $200k.
Depends on when I started saving. Saving big at a young age works wonders due to compound interest.
The Millionaire Next Door by Thomas Stanley gives an interesting formula for knowing if you are on the right savings track: age x pre-tax annual household income(less any inheritance)/10 is what your net worth should be if you are on track savings wise.
When I run this formula for myself I come in above what the formula shows I should have.
Quote:
Originally Posted by user_id
This is all relative to one's income, a family making $500k a year can spend far more money than you while also saving far more than you. Even if this family saved 50% of their income, they'd still be able to spend a lot of money.
I agree completely. Depending on their habits, they may also need to save quite a bit more in order to maintain their standard of living should they ever want to retire early, or at a 4% SWR.
Quote:
Originally Posted by user_id
No its not, you guys ignore the income side of things. As above example, someone with a big income can both spend big and save big. The frugality group tends to be low income, it apparently makes them feel better about their situation to assume that anybody that drives a Mercedes, eats out a lot, etc is loaded up with debt and in a poor financial situation.
Not at all. In my case I simply believe as I stated above: People accustomed to a higher standard of living will need to save a correspondingly larger amount to maintain it in retirement.
I don't believe frugality is defined by any set $ amount. A person with a high income can live with a higher standard of living than someone with a low income, and still be frugal according to their means. Conversely, both low and high income people can spend more than their means. It all has to do with how well they accumulate wealth (as opposed to income). Put another way, as it is in The Millionaire Next Door: A person, regardless of income, can be either a Prodigious Accumulator of Wealth or an Under Accumulator of Wealth. The formula I gave above will tell you which you are.
Quote:
Originally Posted by user_id
It is the "frugal millionaire" that is rare, these are people that have done well for whatever reason and haven't changed their spending habits to match their income/wealth. This doesn't happen often..
We agree here. It doesn't happen often. But it does happen.
Depends on when I started saving. Saving big at a young age works wonders due to compound interest.
My calculations already consider the compounding of interest, why wouldn't they after all?
Quote:
Originally Posted by Keim
Not at all. In my case I simply believe as I stated above: People accustomed to a higher standard of living will need to save a correspondingly larger amount to maintain it in retirement.
They don't need to save a higher percentage of their income. My point before was that someone with a high income can both save a much higher percentage of their income yet still vastly out-spend someone with a modest income. Yet, most of the frugality crowd would speak poorly of them because they purchased luxury cars, etc.
Quote:
Originally Posted by Keim
I don't believe frugality is defined by any set $ amount. A person with a high income can live with a higher standard of living than someone with a low income, and still be frugal according to their means.
When people talk about being frugal its never relativistic, just take your own comments. You owe a old home, drive old cars therefore you are frugal. The guy with a $10 million dollar home, $200k car, etc is not going to be considered frugal even though he may have a net worth of $100 million. This frugality stuff is primarily applicable to low to modest income individuals, once you go beyond that it all breaks down.
Quote:
Originally Posted by Keim
It all has to do with how well they accumulate wealth (as opposed to income). Put another way, as it is in The Millionaire Next Door: A person, regardless of income, can be either a Prodigious Accumulator of Wealth or an Under Accumulator of Wealth. The formula I gave above will tell you which you are.
The millionaire next door paints a very inaccurate picture of the world, but that is what happens when you cherry pick examples and write a book about them. Someone with a modest income is not going to accumulate a lot of wealth by simply being frugal and saving money, serious wealth is generated in business. The formula you cited is useless, wealth is often built very quickly in a matter of years not over a lifetime.
A serious book about accumulating and building wealth would be a book about business.
The millionaire next door says that having a large income is important. Most millionaires make between 70-200k a year. But they also are frugal, and they give percentages on their findings. they also state what businesses that they are in, 75% of which are self-employeed. In order to accumulate over a million dollars in assets in a few years someone would have to save and invest hundreds of thousands of dollars after taxes. But only a fraction of a percent of the population have the money to do that. While 3.5% of households are millionairs, and the majority of them dont have the money you are talking about. Your numbers dont make sence, and i bet you cant provide a source.
The millionaire next door says that having a large income is important. Most millionaires make between 70-200k a year. But they also are frugal, and they give percentages on their findings. they also state what businesses that they are in, 75% of which are self-employeed.
The millionaire next door says all sorts of things, but none of it is founded on real research. The author cherry picked examples, there was never any serious research completed for that book.
Quote:
Originally Posted by maschuette
In order to accumulate over a million dollars in assets in a few years someone would have to save and invest hundreds of thousands of dollars after taxes. But only a fraction of a percent of the population have the money to do that. While 3.5% of households are millionairs, and the majority of them dont have the money you are talking about.
You're thinking of traditional investing and this is just my point, serious wealth isn't built that way but rather in business. Someone can generate millions from $1,000 in business. There are numerous start-ups across the country that were started with just a few thousand and in matter of 2-3 years where worth $10+ million. Even more modest start-ups can generate huge returns in relation to the initial investment.
The millionaire next door is a study of the average millionaire. They use the data that they received from thousands of questionaires and even checked their numbers to make sure they were telling the truth. Your right, i am talking about traditional investing because that is what the average millionaire does. They are 57 years old and save and invest a large percentage to get them into a 7 figure assett group. They are not the millionaires that most poeple think of. Basically they are showing the rewards of a frugal lifestyle. On the other hand, they show the problems with being a hyper consumer. For instance, many doctors dont have very good finances compared to their large salaries, because of their lifestyle. It is hard to save and invest when you pay 60K on your mortgage, 20K on car loans, 15K on property taxes, 30K on memberships, 30K on clothing. These high income earners say they dont have the money to invest, i can see why.
I think it would probably shock you to see the net worth of a group of people seated in any room such as a town hall meeting. The ones with the good balance sheets are probably not the ones with the designer bags, acrylic nails or the one driving the latest car or giving the most parties or the one with the most elaborate home. The millionaire may be the one that doesn't even have a cell phone.
You cannot accumulate money by drinking, partying or smoking it away. The millionaire also does not want to bring attention to what he owns, because he will then become the target of someone who wants what he has.
Sometimes you can just know someone has money. The really good indication that the one who can afford what he wants is the safe car, warm coat, comfortable shoes. or that is my opinion. They do not have to impress anybody, because they are impressive without trying. It is that nice couple down the street that may have never had an alcoholic drink in their lives and they may eat at Wendy's because the food there is healthy.
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