Last week, I read along on twitter and bit my lip as MMM tried to talk some sense into a mainstream finance writer & editor who tweeted a link to a New York Times article. Above the link, she wrote:
“The basic flaw at heart of so many retirement calculations: you cannot possibly save enough to live on for 30 YEARS.”
The basic flaw at heart of so many retirement calculations: you cannot possibly save enough to live on for 30 YEARS. https://t.co/c30pAmp8P4
— Heidi N Moore (@moorehn) March 8, 2017
This wasn’t tongue-in-cheek. She was serious. I don’t know this writer, but she appears to be a professional. Her name is Heidi, and she has a twitter verified check-mark next to her name. She’s been a self-described financial journalist for 18+ years. Her twitter bio shows she’s an alumnus of Marketplace, Guardian, and the Wall Street Journal. In all seriousness, this woman is significantly more qualified to talk about finance than I am!
As Pete, myself, and numerous other defenders of Financial Independence chimed in, she dismissed us one by one. Pete was a special case: he and his wife had high incomes when they were employed. The stock market is dangerous because of frequent dips and recessions. The year 2008 was ‘proof’ that the stock market was not the vessel to choose for retirement savings.
Others came to her defense, reminding everyone that saving a million dollars is incredibly hard, that most Americans don’t make enough money to save let alone invest, and that low-income is the problem, not lack of saving. Eventually, she accused someone of mansplaining finance to her, and the conversation got quiet.
You Cannot Save Enough
Perhaps Heidi’s bold statement is technically true. From her perspective, Pete, myself, and the entire FI community are a bunch of frugal weirdos. We don’t play by the standard set of rules. We save the majority of our dollars and don’t take on debt like everyone else, which is why we can live comfortably near the traditional poverty line. Our methods haven’t made their way into mainstream financial circles yet. At the time of this writing, we are just a bunch of outliers.
The mainstream financial community would agree with her. The New York Times article she linked spewed the standard “people are all living longer, savings is hard, we have to work forever” complainypants sentiment.
Let’s talk about the average American household, with their average $168,614 mortgage, average $27,141 auto loan, average $15,762 credit card debt, and average $48,172 student loan debt. If you live in this household and don't change your spending habits, then Heidi’s statement is true: you likely can't save enough to live this way for 30 years! If you are expected to continue down the average consumer path, then yes, saving for retirement is going to be an insurmountable challenge for most Americans, even the ones with high incomes.
Let's Talk Spending
So, what’s the big deal here? Someone was wrong on the internet! Is this really a shock? Why get worked up over this? Why is Heidi different than any other member of the internet retirement police, telling us what we are doing is impossible?
Because it’s an opportunity to start a dialogue about underlying assumptions. Heidi clearly has the assumption that the average American doesn’t earn enough money to save for retirement. She seems to think it’s an income problem. I disagree. I am under the assumption that the average American doesn’t put any effort into budgeting or even tracking their expenses, and is therefore incredibly wasteful. I think it’s a spending problem.
So who’s right? Well, outside of the FI community, no one really likes talking about reduced spending. It’s easier to blame income: if I had a few hundred dollars more each month, I’d be able to save. If I made as much money as Pete and his wife, I’d be able to save. If I won the lottery, all my financial problem would be solved!
But this just isn’t true. The hedonic treadmill immediately robs you of the imaginary additional hundred dollars. Lottery winners don’t hold onto their winnings long and end up back at square one. Most Americans simply have a spending problem they don’t realize because everyone else has it too, and it's become completely normal. I suspect the same is happening in Canada and other wealthy nations.
Change Your Perspective
At the end of the tweet storm, Mrs. MM chimed in with what I consider the smartest statement on the entire thread:
“I think a huge shift in perspective has to happen to understand early retirement. That can't happen on Twitter.”
— Mrs. Money Mustache (@mrsmoneym) March 9, 2017
This. One thousand times this. The truth is that savings doesn’t have to be hard, but people need to shift their perspectives to realize it. They need to challenge many popular assumptions.
For example: having your own home and two cars in the driveway is practically a right in the United States. I mean, everyone deserves these things, right? It’s the American dream! Check out this ad from Quicken loans to see what I mean:
“None of this makes rational sense. It only makes American sense. Here, the hard things show us who we are. Leaving your job to start your own thing. Having a kid, when you still feel like a kid. Signing a 30 year mortgage on a home. Scary? Sure. But no match for our colossal self-belief. We’re supposed to do scary. Without scary, we don’t get to be brave. BUY IN.”
To those outside the FI circle, this commercial seems innocent enough. But to me, I see predatory marketers pressuring a new generation of young home buyers to sign the damn contract and literally BUY IN for 30 years. As argued on Millennial Revolution, if you're in a high cost of living area, and you BUY IN on an ‘average’ sized mortgage, this is pretty much guaranteeing you won't have enough money at the end of the month to invest for 30 years.
Or perhaps longer… my hardworking parents owe more on their home today than they did when they took out the mortgage three decades ago… these are dangerous products when used irresponsibly. Remember, in old French, mortgage literally means ‘death pledge.’
The American Nightmare
Owning your own home is not a right. It’s not the American dream. Suburbia is nothing more than a marketing ploy. The mortgage industry is big business. There is significant profit to be made in interest payments, as we discussed in our last post. Remember: banks buy and sell mortgages, not houses. They don’t want houses. Houses are terrible investments.*
There’s nothing wrong with buying a small, affordable house when you have a respectable net worth and a sizeable (say, 50%) down payment. But treat it like the luxury it is- not a right! You don’t need a house: you can rent a small apartment. Better yet- rent a small apartment with roommates. Or live with family for a few years after high school or college. Dave Ramsey has a quote that has always stuck with me:
“If you will live like no one else, later you can live like no one else.”
Essentially, if you are willing to live slightly ‘less than comfortable’ for five years or so, you can spend the rest of your life living exactly the way you want to.
So when shopping around for that house, don’t forget: housing costs scale with square footage. The larger the house, the higher the taxes, the more it costs to insure, the higher your air conditioning and utility bills, and the higher and more frequent your maintenance expenses. With housing, less is more.
A similar concept applies to cars. Shiny new cars not only have a higher sticker price, but are significantly more expensive to insure. If you buy a high performance car, you’ll likely need to pay for premium gasoline. You’ll likely drive it more aggressively too, using even more gas. And luxury cars indirectly encourage driving more often, scaling the above costs even more.
When you get your driver’s license here in Florida, they reiterate that driving is a privilege, not a right. I completely agree. You don’t need a car for every member of your family. Especially not a shiny new car. Save up and buy a small used car for $5k cash, change the oil, tires, and brakes regularly, then drive it for ten years. Worried about increasing gas prices, or perhaps your family's safety driving in a small car? DRIVE LESS. Carpool more. Utilize public transportation. Move closer to work. Walk. Rearrange your life in such a way that you are in control of, not a slave to, your car.
Let’s Fix the Leak
OK. So you’ve taken my advice: You've moved closer to work, or relocated to a more affordable city. You rent or own a small affordable house, and share an affordable used car. You’ve done everything right but you STILL can’t find any money to save at the end of the month. Perhaps you are a single mom, working near minimum wage just to pay the bills.
|Cell phone plan||$50.00|
|Cigarettes and other vices||$0.00|
|Going out to eat||$100.00|
|Insurance (car, home)||$88.00|
|Interest on cars, credit cards, loans, etc.||$0.00|
|Landline home phone||$0.00|
|Lottery and gambling||$0.00|
|Monitored alarm service||$0.00|
|Soda and other gas station conveniences||$0.00|
Cut out the waste from your spending!
How do you stack up? You don’t actually need to spend money on any of the items above. Any spending in these categories should be planned and intentional. I used to pay for a monitored alarm service, until I realized I was just being paranoid. I used to pay for cable TV, until I realized I was paying money so I could be less healthy and have less free time. My long car commutes and dry cleaning bills were the worst: I was literally paying money just to work! I had to change my perspective on what expenses were ‘normal', vs. what expenses I actually needed in my life.
JD Roth makes an excellent point in his interview with Brandon on the Mad Fientist Podcast. I’ll quote it here:
“…Take responsibility for your situation, for your future, for your destination, where you’re going. Don’t wait for somebody else to solve your problems for you. I like to say your situation may not be your fault, but it’s your responsibility to get out of it and to change it if you don’t like what you’re in.”
He goes on to reiterate that it doesn’t matter how or why you reached your current place in life, what matters is to focus on the hand you're dealt. This is crucial to achieving the shift in perspective that Mrs. MM mentioned. YOU are in control of your money! If you don’t have have any money to save at the end of the month, that is your own decision, whether you recognize you are making it or not. It is YOUR responsibility to fix it.
There are a growing number of us becoming financially independent and proving that you absolutely can save enough for a 30+ year retirement. If enough of us change our perspectives on money, we can change mainstream financial advice. Start tracking your spending! Cut out the waste. Don't fall for the ‘American Dream' of a brand new house in suburbia with a white picket fence and two new cars in every driveway.
With the right perspective, we can all enjoy a very early retirement, whether Heidi thinks so or not.
*This doesn't mean you can't make money in the real estate market. Many do, with intelligently purchased flips and rental property portfolios. I am merely challenging the age old “your house is a great investment” advice. Absolutely wrong.