This past weekend The Wife and I went to see Crazy Rich Asians, and really enjoyed it! (Featured image credit: Entertainment Weekly) Having been on the FIRE journey for a few years now, it was fun taking in all the over-the-top luxury on the screen. Of course, this wasn't the focus of the movie, but seeing how people think about money on different ends of the wealth spectrum was quite entertaining. It got me thinking about all the different ways people think about, and talk about, money.
Luckily, the Financial Independence community has grown significantly since I discovered it back in 2014, bringing balance to the extreme spenders trying to keep up with their ‘crazy rich' neighbors. There are dozens of new blogs, podcasts, and online resources that didn't exist when I first started my journey. As Brad and Jonathan of ChooseFI like to tease, “The FIRE is spreading”!
The problem is, as the message spreads, so do the misconceptions. I find myself constantly addressing the same misunderstandings and myths with many of my readers, friends, and family just discovering FI, so I wanted to create a resource to debunk many of these myths once and for all. Let's dive in!
Why Live Like I'm… Poor?!
The most popular misconception by far, I usually hear this one worded as follows: “I don't want to live like I'm poor for a decade so I can go on living like I'm poor for the rest of my life!” When faced with change, people often become dismissive. This is usually the first line of defense someone puts up when actually considering what it would take to adjust their lifestyle to create a high savings rate.
Here's the truth, though: You don't have to “live like you're poor” on your journey to FI… it's OK to spend money, it's just that timing is important. When I wrote my ‘Letter to My 22-Year-Old Self‘, I gave an example with designer sunglasses:
“Let’s say you want to buy a $400 pair of designer sunglasses. If you have $100 to your name, that purchase is 400% of your net worth. (Not good, but with a positive net worth, you’re already doing better than half of the U.S. It’s a low bar.) Now, let’s say you wait a few years, work hard and save a large portion of your income, and get your net worth up to $400,000.00. (I know it looks like a large number, but it doesn’t take as long as you’d think to save it.) Now, you buy that same pair of sunglasses. But this time, that $400 purchase is a mere 0.1% of your net worth. A tenth of a percent doesn’t even move the needle. You can comfortably afford it now.”
The key concept here is that timing matters – you can have anything you want, just not initially, and not all at once! It's important to do things in the right order, at the right time during your journey. When you're at the beginning of your FIRE journey, particularly the first five years, you want to do everything you can to get your savings snowball rolling. Large purchases can do significantly more damage in your early years of savings than they can later on. Looking at potential expenses as a percentage of your net worth can help cement this concept and make it clearer.
But… I Like Nice Things!
Who doesn't? Even the great Mr. Money Mustache lusts over iPads and Teslas. The thing to realize is that FI is NOT about deprivation! In fact, when friends challenge me on this point, I explain to them that FI is, in fact, the ultimate luxury purchase! I'm buying a perpetual money making machine that gives me the luxury of complete freedom from the need to work for money. What could be fancier?
As with most luxury purchases, though, you have to be choosy. As Paula Pant from Afford Anything says, you can have anything you want, just not everything. I want my ultimate luxury purchase so much that I'm willing to give up many luxuries that others enjoy on a regular basis, like eating out at fancy restaurants and having multiple cars in their driveway. This isn't deprivation, it's a calculated choice.
And it doesn't need to be permanent, either: last month, The Wife purchased a fancy pants car! It's true: for the first time in five years, we have more than one car in our fleet. What happened?! Won't this throw off our FI plans? Won't this undo all the hard work we've done in the past?
Actually, no. You see, as I described above, the car purchase, which was made in cash, was a small percentage of our net worth. It didn't move the needle. The Wife wanted something she valued, did some math, and after some research, made the purchase. Mr. Money Mustache even admits there comes a time where such purchases are trivial:
“When can you truly afford a fancy car? Well, once you have the cash for it in the bank, your house and all other debts are fully paid off, and you are either retired or very comfortable with delaying your eventual retirement for a year or more to pay for this depreciating piece of luxury property, THEN you can roll into the dealership.”
Check, check, and check. The Wife's purchase is MMM approved! She's not alone: as another example, Mr. 1500 recently purchased a fancy car he'd been eyeing for a few years as well. And like us, he waited until the purchase was such a small percentage of his net worth that it didn't even register as a blip on the radar! See? You can like nice things and still pursue FI just fine.
What if we made this very same purchase a mere three years ago? Shockingly, the purchase would have cost us over 14% of our net worth! Think about this for a second – three years ago, this car would have cost us a small fortune! In fact, based on some back of the napkin math, buying the car three years ago would have set our early retirement date back past the year 2020. That's crazy, right? Simply pushing large purchases a few years down the road on your journey can literally shave years off your mandatory working career. I knew there was a good use for procrastination!
FI is For The Rich
Another popular misconception is that only those who make six-figure salaries can successfully reach FI. Actually, it's quite the contrary. Everyone can pursue FI, regardless of income or pre-existing wealth. Sure, income is a variable and can add or subtract five years from your journey, but so can training your frugality muscle. What's interesting, and in line with our car conversation above, is that one of the best predictors of your current economic status is actually the way you spend your money!
The poorest Americans in the lower class spend the majority of their money on consumables: think food, clothing, gasoline, electronics, etc. Those in the Middle class spend the majority of their dollars on liabilities, such as cars, boats, and vacation homes. Finally, the wealthiest Americans spend the majority of their dollars on investments and other cash producing assets.
I hear you screaming. “Of course the wealthy spend the majority of their money on investments: they have tons of cash to spare! The poor have no extra dollars to buy investments!” There is some truth here, especially in cases of extreme poverty, but for many of us in the middle class, this thinking reverses the cause and effect relationship: The wealthy don't spend the majority of their dollars on investments because they have lots of free dollars to spare. Instead, the wealthy have lots of dollars to spare BECAUSE they spend the majority of their dollars on investments!
I want you to track where your money went last year. Every dollar. Make a pie chart and take a look. For those of you pursuing FI, and saving more than half your money, I'd predict you are quite wealthy, or if not, you will be soon enough! Take a look at where our dollars went last year:
For those who have more than half your money going toward liabilities such as cars, personal residences, and their related expenses, I'd predict you are firmly in the middle working class, and will be stuck there for the foreseeable future unless you change your spending. It's the spending (or lack thereof!) that influences your financial trajectory, not the wealth itself. Remember that this works in both directions, too: fortunes have been squandered by people who don't realize this relationship.
So You Have… Infinite Money?
For people who don't understand the psychology of money, they see no irony in the following statement: “If I were rich, I'd buy all my friends and family fancy houses and cars and would be very generous with my money and definitely wouldn't be a cheap-skate!“.
Those with money know-how understand that this kind of spending prevents you from ever becoming wealthy in the first place, and if you happen to inherit a fortune, well, you won't keep it very long. A friend recently pointed me to this outstanding article titled “The Psychology of Money” that really opened my eyes to the right, and very wrong ways people think about money.
When I first quit my job, I wrote about why I tend to keep money matters private around friends and family:
The way I see it: “I have carefully constructed my perpetual money making machine, and can now start enjoying up to 4% annual withdrawals whenever I'm ready. I'll never take out more than that…
The way most people see it: “Wow you've saved so much money that you never have to work again?! That's like infinite money! Why don't you use it to help everyone do everything? What do you mean you won't fly out to visit on a moments notice and bring lavish gifts!?”
When I look at my portfolio, I see a $25k per year annual spend, which, to most people, doesn't seem like a lot of money. But others see $625k sitting there, a literal fortune just waiting to be spent. It's the same amount of money in both cases, just different perspectives leading to very different spending assumptions.
Remember: you don't chop down the tree when you've picked off all the apples – you plant more trees! I will, to the best of my ability, NEVER spend more than 4% of my portfolio and break my perpetual money-making machine. This comes down to short-term thinking vs. long-term thinking and is a significant money misconception.
OK, four down… a hundred more to go? There are SO many misconceptions about Financial Independence. It's impossible to cover them all in a single post, but I think we covered the most popular, based on emails I've received from readers.
Some key takeaways?
- Timing matters when it comes to large expenses. Delayed gratification is challenging for everyone, but is an essential skill if you want to become wealthy!
- FI is not about deprivation: It's OK to want nice things, as long as you realize the true cost given your progress on the journey. For example, I realize now, better than ever, how much of a true luxury a second car is, having gone without for five years.
- If you want to be wealthy, your spending (saving) habits matter more than anything else. As we saw, different perspectives on money lead to some very different assumptions.
Looking back, I've actually already addressed numerous other misconceptions in previous posts right here on the blog, but I'm realizing that (gasp!) new subscribers don't always go back and dig into the older content. So here's a rapid-FIRE list of misconceptions and posts I've written that clear the air! Point friends and family here when they bring up any of the following popular money misconceptions:
There's nothing else I can trim from my budget!
Are you sure? We found over $1,000 per month hidden in ours. Read our post 180 In Depth – Part 2 to see how we turned cutting back our expenses into a game.
I enjoy shopping and won't give that up!
You don't have to stop shopping… you just have to shop smarter! Tricks like the 72-hour rule and cart-free shopping help immensely. Read our post Monthly Savings: Shopping for ideas.
Food is expensive; there's just no way around it.
We thought so too… and then we cut our grocery bill in half. Knowing where to shop and what to buy is key. Read our post Monthly Savings: Food for the tricks we learned, like our $3 rule, and a breakdown of item costs across different stores.
You can make money quicker and easier with real estate!
Quicker? Maybe… easier? Well, before you dive into the real estate world, read about our six-figure losses and our ‘renter from hell' in our posts How Not To Buy A House and Adventures in Real Estate.
I Don't make as much money as you, so I have to work longer.
Surprisingly, the length of your required working career isn't determined by how much you make, but rather, how much you save. The more you flex your frugality muscles, the more you save, and your required number of working years reduces. Want to figure out how many years you have left? Read our posts How Long Will You Work? and Why You Can't Retire.
Investing is too complex for me to do on my own.
That's a popular belief that makes a lot of money for the investment advising industry. Investing doesn't have to be any more complex than opening a bank account and choosing a fund. We walk through this in detail in Investing Can Be Simple.
I have the discipline to take on debt responsibly.
Debt is the Ying to compound interest Yang, a force that accelerates your money into the red. It's surprisingly easy to accumulate and surprisingly hard to get rid of once you're knee-deep. Read The Dark Side of Interest and You're a Hazard To Your Money for more on this.
What if I go too far and become a miserable cheapskate?
Being frugal is different than being cheap. It can actually be a good exercise to push your frugality to the extreme for a few months to test your limits, but there are natural boundaries you'll encounter that should stop you from going too far. For me, it was living with my in-laws, and the experience left me ready to jump out of my skin. Read about it here: Frugality vs. Sanity.
There's no way I can reduce my driving expenses.
This is a hot topic, but in the style of Mustachianism, I don't believe driving is a necessity. As I alluded above, I believe driving is a LUXURY and we can all do more to trim this expense down. Read The Car Problem and FI is Hard for more ideas, including how we spent five years as a one car household.
But… I like my job!
Financial Independence doesn't require early retirement, and isn't an all or nothing concept; It's actually a smooth continuum of increased benefits along the savings journey. Some of our most popular posts, The Power of FU Money, The Milestones of FI, and Are We FI Yet, discuss this in detail!
Why would I put my money in a 401(k) I can't touch until I'm 60?
Contrary to popular belief, the money you put into tax-advantaged accounts is yours to access at any time, and there are numerous ways of doing so fee-free! Read Don't Fear the “Penalty”! to figure out how.
I'm too afraid of <healthcare, recessions, asteroids> to pursue FI.
The best way to face your fears is to better understand them. In Replacing Fear With Flexibility, we discuss these hot topics in great detail.
I'll never get my <significant other> onboard with FI; so why try?
You'd be surprised what people would be willing to try when they wrap their heads around the concept of never having to work for money again. Why not do a ‘trial run' to test the FI saving waters? Check out my Interview With ‘The Wife'! for how my wife and I deal with differing opinions on money.
If FI is so simple, why isn't everyone doing it?
FI may be simple, but it certainly isn't easy. It requires significant financial muscle and is guaranteed to push you out of your comfort zone. Read about how we tackled the ‘big three' expenses in FI is Hard.
That's everything for now! I've also pasted a copy of this helpful index on our Start Here page, so if you enjoyed, feel free to share. Any FI misconceptions I missed? Let me know in the comments and I'll add them to the post!
Interested in starting your own Financial 180? You've come to the right place. The math is easy: create a gap between what you earn, and what you spend. If you can save half your income, your working career will only be around a decade long! Want to shorten it even more? Read on to see exactly what expenses the wife and I cut from month to month. Track your progress against the milestones of FI, and gradually build up your own savings snowball. Check out the books and links in our resources section and jump-start your journey to FI. The you ten years from now will be glad you did!