Is frugality for the rich?

[BRUTE]

however, society is strangely more concerned about income than assets, so assets ares not as valuable as one might think.

brute thinks this is because capital can be hard to see. Dear Leader jacob doesn't look any different to brute if he has -$100,000 in his bank account vs. +$100,000. proxies like giant houses and luxury cars are valued by society an mainstream culture, often also as proxies for income. because technically, brute can't see jacob's income just by looking at him either.

these proxies like cars, houses, vacations get mapped to "the Joneses must have a high income" or "the Joneses must have inherited a lot of money" (capital).

since most poor/middle class humans have much more familiarity with salaried incomes than with capital income, it might lead them to think about the former much more often.

[Fish]

Frugality is not only for the rich. However, FIRE resulting from modest frugality is indeed only for the rich.

To help visualize this, see the below plot of expense/savings rate contours as a function of household income. This is USA data for the year 2016 taking into account federal taxes (incl. SS/medi) and average savings rates as a function of gross income. I can provide more details about data sources and methodology on request.

Suppose a target expense level of 25k, to get 50% SR requires a median income (i.e. half the population is excluded from mainstream frugal-FIRE) and furthermore, most who do live comfortably at this expense level have the advantage of mortgage-free shelter. Acquiring that will add at least a few years to the accumulation phase of a median income FIRE-seeker.

[black_son_of_gray]

@Fish - neat!

Using the income percentile ranking link that Jacob posted, 75-80k in income smears across the intersection of typical household expenses and the 10-30% savings rate contour (if I am reading that correctly). What's interesting to me is that 1) this is the typical savings rate goal for traditional retirement, and 2) this is the point at which a popular happiness study says that happiness from higher income begins leveling off. Coincidence? Probably...

Also, does the discrepancy between 0-40% household income and the typical expenses line mean that most of those people are going into debt or that they receive various forms of assistance that aren't counted as income?

[Tyler9000]

That's a terrific chart. Thanks for sharing.

[Fish]

The formula I used was:
Expenses = Gross Income * (1 - tax) * (1 - SR)

The 2016 GI percentiles come from Jacob’s link. The federal tax data is from https://taxfoundation.org/how-much-do-people-pay-taxes/ (2nd figure). To get the typical expenses line, savings rate data from https://dqydj.com/how-much-do-people-save-by-income was used (see table, expenses method), which in turn was derived from the BLS consumer expenditure survey. I don’t trust the SR data, but I used it anyway. I haven’t looked at enough raw data to decide whether the typical expenses line is valid below the 40th income percentile, so take that with a grain of salt. The negative savings rate also piques my curiosity but I won’t speculate on causes due to lack of knowledge. Anyone with a hypothesis may be interested in the BLS-CEX methodology: https://www.bls.gov/cex/csxgloss.htm#inc

[jacob]

@Fish - And now to plot where people/bloggers reside on this chart

Instead of savings rates for the contours, the point would be real clear if they're renamed with "working years" (=time to FI).
Using networthify.com, I get

10% = 51.4 years
20% = 36.7 years
30% = 28 years
40% = 21.6 years
50% = 16.6 years
60% = 12.4 years
70% = 8.8 years
80% = 5.6 years
90% = 2.7 years

[Fish]

Same data, but with contours indicating working years instead of SR. The networthify assumptions are used (5% ROI, 4% SWR).

It would be neat to comb journals and well-known blogs for data points and see how many are playing on easy mode vs. hard mode.



Edited to add:
Many of the subsequent questions about the typical household expenses line can be answered by reviewing BLS-CEX Table 1110 "Deciles of Income Before Taxes": https://www.bls.gov/cex/2016/combined/decile.pdf That link also contains expense data which is surprisingly consistent with my own computation using data from 3 datasets.

Household income percentiles are provided below, broken down by number of income earners. For ease of use, I've presented this as pre-tax data. Source: https://www.census.gov/data/tables/time ... nc-01.html (For more discussion on what counts as "Total Money Income", also see this page: https://implanhelp.zendesk.com/hc/en-us ... old-Income)

[jacob]

Now the typical household expense makes more intuitive sense. For example, normal ER aka working for 30 years and retiring at age 55 requires incomes in the 80%+ percentile (where the green line crosses the 30 line) and is doable w/o diverging from the spending pattern of your peers. RE at 45 requires either extremely high (95%+) incomes or special measures (frugality).

Whereas people under the 40% percentile would be dead (on average) before they ever got to retire w/o SS. (Maybe this indicates why so many fall into ERE Wheaton level 1.)

[classical_Liberal]

@fish, fun data comparison!

Re easy mode vs hard mode. I get the point of making the distinction. However, there is a clear case to be make that someone with upper end income has a significantly higher amount of energy being used in the income generation category. Assuming total individual energy output is limited, this comes at the expense of other endeavours. Although it's not a forgone conclusion it comes at a monetary expense, that is often the case (eg increased housing expense to be near work vs total freedom in location to save time) Of course there are exceptions to any rule, and maybe the prototypical tech worker is one of them? IDK because I've never been a tech worker, but reading the journals it seems relatively time intensive, at least in the early stages.

I do know, I could work less hard at making money. I would earn less, but my energy devoted to earning money could be reallocated to endeavors which reduce monetary outflows (see 7WB5's strategy). This circles back to Jacob's comment that a minimum wage earner trying to achieve FI will likely not earn minimum wage for long.

I posit that easy vs hard mode has much more to do with "luck" (genetic and geographic lottery, exposure to differing frameworks, etc) than it does a snapshot of income vs savings rate.

[jennypenny]

How can the line indicating typical household expenses be above the curve for everyone under the 40th percentile? Are they all spending more than they earn? Through debt? Public Assistance? (sorry if I'm not understanding)


The impression I get from the chart is that if someone is above the 50% percentile in income, they should focus on expenses. Below that, it's more important to focus on raising income (if we're talking about ROI on effort).

That said, I can somewhat understand why people in the bottom half get caught up in consumption. As was discussed earlier, optionality and social capital are very important. If a person is trying to 'improve their station' as my gram used to say, they need to improve their social capital. Being a well-respected person in a low-income neighborhood isn't going to bring the same benefits (job networking, investment opportunities) as being a well-respected person in a middle to upper middle class neighborhood. Any children will also benefit more (generally) from the social and educational opportunities that a better neighborhood will bring. That means that overspending on a home in a better neighborhood might help to push a family up the income chart. If not them, then possibly their kids.

It's not as simple as buying a 'better' home either. There are a lot of other expectations that come with that including clothing, cars, and extracurricular activities. It might seem foolish to most of us who are on the 50%+ side of the income chart, but looking at it ... I can see how a person/family might benefit more from that kind of spending (on housing and the trimmings) if they are on the lower end of the income chart. They need to fake the credentials at first to build the kind of capital that might help them get above 50%.

I'm *not* arguing for mindless consumption. OTOH, I can see spending more than $25K/yr (carefully) to try to push yourself into the higher income brackets, and then dialing it back. A clever person can do it for less or figure out other ways to achieve the same thing, but I'm sort of assuming that we're talking about average people with average IQs and average educations and prospects. From their perspective, I can see where frugality is only for the richer half.


The chart also shows that if a person is going to 'follow their passion' into a low-income field (social work, musician), then they must stare at that chart until they realize what they are facing as far as FIRE prospects. This is what I've done with my kids. I've hammered at them to learn all they can, make as much money as possible, and then start indulging their passions once they've crossed the FI threshold.

[classical_Liberal]

How can the line indicating typical household expenses be above the curve for everyone under the 40th percentile? Are they all spending more than they earn? Through debt? Public Assistance? (sorry if I'm not understanding)

All of the above and negative tax rates, at least that's the assumption I've always made when looking at spending data.

A clever person can do it for less or figure out other ways to achieve the same thing, but I'm sort of assuming that we're talking about average people with average IQs and average educations and prospects. From their perspective, I can see where frugality is only for the richer half.

The average person's IQ is 100 and in the US they are, at best, a post secondary dropout. What are the income prospects for someone like this without social/familial connections? To clarify, this is what I mean by genetic lottery, not necessarily race or gender. I think it's hard for many of the significantly IQ advantaged forum members to understand what it's like to have an "average" intellect or creative ability. Factors like IQ and exposure to good ideas (like @JP's kids) play a huge role in easy vs hard mode. Working harder is sometimes the only option when one can only work as "smart" as the average person.

[7Wannabe5]

@jennypenny:

A good percentage of the households spending more than they earn might also be retired individuals spending down their capital. Also, lower income individuals may be more likely to earn off-the-books income. For instance, workingman who in between tile jobs, hauls junk for cash. Also, funds transferred by family members who do not share households. For instance, if a young divorced mother was helped by her parents financially. The first article with animated graph showing individual, family, and household income percentiles was trying to draw some correlations like these.

Another example would be that slacker-moi is currently around 20th percentile for personal income and my BF is somewhere between 90-95th percentile. As a household, we would be just north of 80th percentile. The "lifestyle" we currently (temporarily) share costs maybe $30,000/year, and I currently chip in about $3000 to his $27,000, which would make our individual savings rates after taxes near identical around 75% if it weren't for the fact that he still has to throw down child-support and alimony and gifts to boost the household spending of his ex and son up to something north of $80,000 (I am guesstimating her income as maybe $55-$60.) The moral lesson for the youth being something like "keep your 1st wife happy!" The math lesson for the youth being something like it may be easier to carry the far larger portion of a small bundle than half of a large bundle, especially if you take fixed costs into consideration.

[Fish]

Here’s a reminder that source data and methodology are available before we delve too far into the analysis. The typical spending line combines 3 datasets in a context-free fashion... and the author of the SR table doesn’t have a lot of confidence in it (see DQYDJ link). I also should have adjusted the tax and SR breakpoints to 2016 dollars but precision was the least of my worries. It’s kind of like the best country for FIRE rankings, it can’t be taken too seriously if you know how the sausage is made.

@jp - Your points about focusing on increasing income when below the median remind me of this book, whose tag line is “spending now to increase your true wealth forever”. I’d recommend it for your kids. https://www.amazon.com/Last-Safe-Invest ... 1591846110

[SustainableHappiness]

Wow, that's a kick ass chart. Thank you Fish.

*edit - Just read what you said a bout the source and methodology being a little garbage...Still a kick ass chart.

[TheFIminator]

Frugality is for anyone, its all relative. If you earn $300,000, your version of frugality will be slightly different to someone earning $30,000. The principles remain the same. Its usually the 'Keeping up with the Jones' that affects the 'rich' that tends to make it harder to save.

if we stopped comparing ourselves to others and lived our lives as we wanted, everyone can be frugal and live a more meaningful life!

[Campitor]

Working harder is sometimes the only option when one can only work as "smart" as the average person.

There is nothing wrong with working harder - it's the one thing within everyone's grasp. I guarantee you that the rich, especially the ultra rich, are putting in more hours of work than anyone else. Even our esteemed ERE leader JLF put in a lot more work than most people to live a modestly comfortable lifestyle that agrees with his personal philosophy.

I went to school with guys who weren't that smart - I know because I helped tutor them. Several became very successful through hard work or by exhaustively applying themselves to higher learning. One of my buddies was very dense and I worried about him constantly. Nice guy but not bright; he failed constantly and struggled grasping concepts. He persisted despite his learning handicaps and eventually earned a PhD.

I came from a poor family and many of my relatives have high IQ and some have average intelligence. In my own anecdotal experience, the relatives that are in the top income percentiles were the ones that worked harder regardless of IQ. Lazy doesn't get you anything but hard work gives you a fighting chance. Who cares if other people have "ez mode" ? I wish people would just focus on themselves and stop obsessing about who had it easier.

[Seppia]

Who cares if other people have "ez mode" ? I wish people would just focus on themselves and stop obsessing about who had it easier.

I have no knowledge about Frugalwoods, as I don't follow their blog/story*, and I guess playing the "I'm middle class/normal" card with a mid six figures income doesn't make anybody likeable/relatable, but I so much agree with the above.

The general message of "live below your means and buy productive assets instead of useless shit" is unquestionably a net positive.
Obviously, achieving 75% SR with a 200k income is much easier than with a 50k income (duh), but if we look for people who "had it easier" we'll always find some regardless of our starting position.

The whiny "ohhh WTF you have it easy with 200k but what about me at 30k?" should just take a deep breath and consider, in the grand scheme of things, what a 30k salary in 2018, in a functioning western democracy means
http://www.globalrichlist.com/

we already won the lottery just by being here and now.


*I have tried one post of almost all "FIRE" blogs/sites/projects, and quickly came to the conclusion that there are only 4 that I found uniquely interesting:

ERE
Portfoliocharts
Mad Fientist
MMM

[thrifty++]

What bugs me most about this criticism is that if focusses on their incomes. They werent born with those incomes. You have influence over how much you earn. If the criticism related more to how their parents contributed to their first home or paid their education I would have more sympathy for it, but it simply whining shit.

[jacob]

I think much of the brouhaha can be resolved if there could be universal agreement as to whether frugality is an absolute measure or a relative measure!

Of course the controversy will never go away because frugality is kinda both---depending on who's talking about it.

If it's relative, you can earn 100k while spending 80k while congratulating yourself on your frugality... alternatively getting ripped by your income-peers because you're living 20% below your means and failing to spend according to your means. This is a psychological challenge because you deliberately say no to keeping up with the Joneses.

If it's absolute, you have to spend significantly below the median to quality lest you get ripped by the random average spender person depending on what percentile you happen to promote! This is an physiological challenge because you have to find actual solutions under real-resource constraints. It's not just in your mind or the mind of your peers. The absolute challenge can be subdivided into two. Either you have to because you're not earning enough to have any other choice or you want to for other reasons (you want to save---because you can---to buy your freedom; or you don't want to burn the planet; or whatever...).

Call these situations 1, 2a, and 2b respectively. There may be more ...

Shitstorms occur when these perspectives clash. I've been involved in a 2a vs 2b shitstorm myself. The FW shitstorm is a 1 vs 2a (mostly math-challenged(*) as Clarice noted above).

(*) There are unfortunately a substantial number of readers who never bother to understand the underlying idea nor extend themselves beyond the simplest of reading and thus get really really disappointed when copying their favorite blogger/book somehow doesn't work out---or worse, when copying just a few tricks w/o understanding how they fit together fails to produce results. Yeah, I know ... that surprised me too... but it's very common and authors should be/get wise to consider this effect lest them find themselves in a shitshow as a reader or a writer respectively when reality != quick and easy expectations. I had to learn this the hard way myself. This was a contributing reason why I stopped blogging back in 2011.

An analog that I grok is to consider the diet&exercise parallel. (1) is like The Biggest Loser in which people who are horribly out of shape figure out how to get back to normal. Many people think that's utterly fantastic! It's like a Couch->5k program. That's a big relative change. Meanwhile, there are many many people (in (2)) who wonder what/why the hype about essentially getting back to the starting line after falling behind is all about?! Why are we celebrating people who moved their 5k time down from 90 minutes to 30 minutes ... and not focusing on those trying to go from 20 to 19 minutes (2b).. or those who are <15 minutes? (2a).

I think a similar analog exists when it comes to racism, sexism, and privilege. The majority of people are tribal and only see the situation from their own perspective. Here I present the framework of 1, 2a, and 2b but it's by no means the only framework. My point is that insofar the majority of readers only see one of them ... and perhaps you as a writer aren't cognizant of all of them .. (not to mention that writing for 3 groups some of whom WILL copy you verbatim is very hard, indeed!) (add that you don't control what cafeteria-style copiers add in or leave out)... it gets extremely hard to control the message. You're therefore bound to get hated on by those readers who aren't cognizant of all of them either. You can draw as many Venn diagrams as you want to try to eliminate such controversies but some will slip through your blind spots.

If you're a writer, you can tell which blindspots are yours by your negative reviews. (Goes back to privilege)

The lesson I learned in the final year of my blogging career was to realize the need to control who my audience was because controlling the message was not enough or rather that I was no longer up to the task when it was reaching a mainstream audience and had to communicate [correctly] with several groups simultaneously. (In my defense, even political parties with all the experts and focus-groups in the world fail to do this on a regular [election cycle] basis.)

[SavingWithBabies]

@jacob So do you find that control by the filtering mechanism of having to make it to the forum, get engaged, etc? Are we your audience? I am definitely guilty of still being in the cafeteria line. My counter to that right now is that I'm more interested in FI and continuing to work on my own things once they make money. But the counter to that is if I just got to FI faster, I wouldn't have to worry about side things making money. So I'm still torn on actually following the advice of your book versus charting my own path. But maybe the fact I'm aware of that still keeps me somewhat in your audience (as opposed to someone who isn't aware of that and then blames you when things go pear shape)?