I am a fanatical follower of Mr. Money Mustache.  This rather amazing specimen of an INTJ used financial common sense and a very uncommon amount of Life Wisdom to embrace a frugal, environmentally-conservative, socially-engaged lifestyle that freed him and his wife and young son from an empty existence of endless consumer consumption and ultimately, at the age of 30, from the need for full-time employment.  No inheritance, no investment windfalls, no magic - just the intellect to know that just because you make $70,000 doesn't mean you have to spend $70,000 (and the discipline and organizational acumen to follow through!).

Respect the 'Stash

Mr. Money Mustache - MMM for short - preaches a gospel of riding your bike, buying used, cooking your own food, frequenting the library, cooperating with your neighbors, tracking your habits and optimizing away the trivial.  He's not some crazy survivalist living an ultra-spartan existence in the woods somewhere - he's a devoted family man with a huge list of hobbies and pretty much the greatest life I can imagine.  He owns a home and a car and he travels with regularity, supporting it all on $27,000 a year through careful consideration of what's actually important. He's breaking into the mainstream because he addresses something that most personal finance gurus neglect: maximizing money for money's sake is a fruitless endeavor, and personal finance is only really useful when applied as a tool for maximizing happiness.


I've written a small book's worth of notes while reading through his several hundred articles, but don't take my word for it - explore for yourself!

The concept of spending less, investing, and using the difference to buy your own freedom is not a new idea: Your Money or Your Life, a popular book on the subject, was released in 1992.  The original Money Mustache, Henry David Thoreau, was writing about abandoning wasteful excess and seeking life's true needs and meaning when he wrote Walden in 1854 (4).

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Early Retirement

Members of the Financial Independence ('FI') subculture recognize that the United States' combination of high real wages, decent social services, and highly-variable cost of living can be leveraged to enable a form of 'retirement' at a very young age.  The term 'financial independence' is preferred over 'early retirement', since early retirees very often end up working part-time or becoming self-employed as 'professional hobbyists' while they explore their passions.  What sets them apart is that they don't have to work - the passive income from their investments is more than sufficient to completely cover their living expenses, plus a significant safety margin.

How is this possible?  Well... like this:

My original graph and spreadsheet are available here: http://goo.gl/g30s5

This graph shows how, as you reduce the percentage of your income required to cover your living expenses, you reduce the length of time you need to work until your living expenses are covered by your investment income.  Reducing your expenses shuttles you to financial independence in two mutually-reinforcing ways:

1. The less you spend, the more you have available to save
2. The less you spend, the less you need to save to cover your expenses

Many financial professionals urge employees to save 10% of their salary, but the US average is only 6%.  At a 10% savings rate with a 5% annualized real return on investment (this is reasonably conservative, given historical returns), this yields a work duration of 47 years.  Granted this doesn't take into account benefits such as Medicare and Social Security, but that's still about what you observe in this country.

With a small increase to a 20% savings rate, work duration drops to only 33 years.  30%, 25 years.  40%, 19 years.  A full half of income?  Only 14 years.  Mr. and Mrs. Money Mustache were saving closer to 2/3rds, yielding a work duration of only 9 years.  Obviously it's easier to save 50%+ of your income when you have a higher salary, but work duration is only dependent on savings rate.

By this point, you probably have a bunch of very good questions about how this is practically possible, how safe it is, or why it's desirable.  For answers to those questions, I must direct you back to Mr. Money Mustache.  Read, and be amazed.  Then, come back here and read this next bit.

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The Time Value of Money

A concept discussed in FI circles is the importance of the time value of money.  Intuitively, having $1 today is more valuable than having a promise to get $1 a year from now.  Practically, this is because you can put that $1 to work in the meantime and use it to make more money.  This is obviously important for understanding financial investing, but what few people realize is it's just as important for understanding and controlling your spending.

In Your Money Or Your Life, the author spends the first part of the book explaining that your actual hourly wage is much lower than what it says on your paystub.  Once you factor in taxes and the time and monetary cost of all of the things you do that are work-related (buying nicer clothes, doing extra laundry, getting presentable in the morning, your commute, checking email at home, telling anyone who will listen how much you hate your job...), you make a lot less than you might think.  When you consider purchasing something, convert the dollar value into the amount of time you have to work at your recalculated wage. Just completing this simple step might put you off of trading hours of your life for trivial things.

But this is only part of the story.  If you hadn't spent that money, you could have invested it!  Once invested, it would have grown in value. The true value of the money you spend today is the future value that money would have been at retirement had you invested it instead. It's impossible to know the exact future value of money invested in stocks, bonds, real estate, and other financial markets, but historical data suggests an average annual rate of return between 5-7% is reasonable.  Given a rate of return, it's easy to calculate the future value of today's dollar.

Most lifestyle purchases, however, aren't a one-time expense.  Cable bills, gym memberships, a latte at Starbucks - these purchases repeat at regular intervals over days, months, and years.  Using some fancy math, it's also easy to calculate how much money these repeating purchases could have made you, had you invested the cash instead:

The original spreadsheet, including calculations at 3-10% annual return, is available here

The numbers in this table are Future Value Factors (FVF), a term I just completely made up.  To figure out how much a purchase today will set you back on your retirement goals, find the number of years in which you hope to retire and reference the appropriate column for one-time, yearly, monthly, or daily purchases.  Then, simply multiply the value of the purchase by the appropriate FVF. This is the extra money you'll have to make, in the year you hoped to retire, to have the amount you would if you had invested the money instead.

(In reality it'll actually be worse than this, because the calculations above assume that you'll magically give up your regularly-indulged vice once you retire.  The principle of hedonic adaptation predicts otherwise!)

Normally you want to assume a conservatively low annual rate of return when doing these sorts of calculations, but in this case it's actually more conservative to look at the higher rates.  This is because the higher the rate of return, the more money you're giving up by spending today instead of investing.

Round these numbers and tattoo them into your brain.  Want to retire in twenty years?  Then remember:

• one-time purchase - 4x
• annual purchase - 40x
• monthly purchase - 500x
• daily purchase - 15,000x

If you're the typical 45-year US worker and you just started working, today's $4-per-day latte addiction will put you behind by $320,000 if your investments return a not-terribly-unusual 7% after inflation.  At a US-typical savings rate, have fun recouping that by working well into your 70's.

Instead of buying trivial junk that'll do nothing to improve your long-term happiness, cut back on your expenses and invest what you can.  Invested dollars form your very own money factory - the more you invest, the faster the new dollars roll in.

Want more information?  Hit up MMM, the Early Retirement Extreme blog, the FI subreddit, or comment below!  It's no exaggeration to say that these ideas can change your life.

Art: Mustache - http://incrediblealyssa.deviantart.com/art/Mustache-TIFF-236097273