Tuesday, March 4, 2014

Relative Costs

Hi, Done by Forty readers. Work has picked up lately, so I am recycling a post from back in February 2013. The blog got about one reader a day back then, and I am pretty sure that reader was my wife, most days. Sweet as she is, she wouldn't admit it, letting me think at least someone outside the walls of our home was reading my words. But the bottom line is that, hopefully, the post will be new to you. I'll be back with original articles soon.
From madmarv00 at Flickr Creative Commons
I'm writing to you from the island of Oahu, as my wife is attending a conference here and we decided to make a vacation of it. We've hiked a lot, up to Manoa Falls and Diamondhead and along the North Shore, watched the surfers take on ridiculous waves at the Pipeline, rode "Da Bus" everywhere for a surprisingly affordable $2.50 (which apparently includes unlimited transfers), and are trying to get our money's worth out of the snorkels we bought at Target back home. It's been a great time and we still have a few more days to enjoy it all.

One thing that has jumped out at us are the prices. We came prepared, with a bunch of snacks for the hikes and our own water bottles and a mindset that spending a ton of money won't make this little paradise any more enjoyable than it already is. But still, it's Hawaii, so tourist prices should be expected. The one that sticks with me is the cost of hotels. We are paying $109 a night at the Ramada which seems fine, I guess, when compared with the main hotel for the conference, the Hilton Hawaiian Village, which charges an astounding $190 a night: supposedly a discounted rate. The grounds of the Hilton are pretty amazing, with pristine beaches and a lagoon right at the footstep of the hotel, hula dancers by the pool, fireworks every Friday, and, somehow, an outdoor habitat with turtles, koi, and, yes, penguins. Still, and I don't mean to insult anyone who enjoys such a stay, it still seems absurd that a lot of these people are presumably paying several hundred dollars, every day, just to be there.

I was reading a thread over on Mr. Money Mustache's forums the other day, and it got me thinking about how one really should consider the prices of things. The original poster, along with his partner, grossed about $500k a year, and had trimmed their spending down to about $120k per year. And this is with a paid-for home. Besides his original question, the details of the poster's spending brought about a wave of criticism, stating that this kind of spending is ridiculously excessive. Some posters went on to ask if such spending was the result of setting buckets of money on fire. This sort of response might be expected: on a site built on the power of frugality and badassity to achieve financial independence, how can one justify such a luxurious existence? It is the Hilton vacation being experienced all year long.

The average family makes a fraction of what this couple spends: most will never earn that much, in real dollars. That is to say, in order to live as this couple does, most families would have to go deep(er) in to debt, every year, forever. From that perspective, of course spending $120k a year seems foolish. But everything is relative, especially costs. To a poor family in the Philippines, our family's $25k or $30k annual spend probably seems ridiculously cushy...to the average family living in NYC, we seem like paupers.

But the simple math of early retirement shows that the only metric that really matters is savings rate. Earning $500k and spending $120k, this couple is ostensibly saving roughly 75% of their income. If that is the case, they are approaching financial independence at the exact same rate as a family earning $60k that is also saving 75% of its income. Invest a certain ratio of your income, and you reach financial independence as quickly as any other family saving that percent (assuming, of course, you start with the same percent of debts, assets, invest in the same ways, etc.). Everything else being equal, the dollar values are immaterial.

There are other factors to consider. A family spending $120k has a lot of wiggle room to improve its savings rate; a family spending $15k does not. And while both families might reach financial independence at the same time, a $3M nest egg can do things that a $375k nest egg can't. Taxes will also play a big role. But I'm most interested in how this relative sort of thinking applies to every day prices and purchases, and how we judge them. The $190 a night price at the Hilton is only acceptable or unacceptable in context, not in absolute terms. To a family earning half a million a year, it's probably a completely reasonable expenditure. To a family earning $40k, it's foolish no matter how you cut it.

I want to start changing the ways I view certain products or services. I have a bad habit of judging people who drive in fancy cars or eat at five star restaurants or who buy more house than I think they should, without considering the context of those purchases. I mean, what do I really know about any of these people except for what they're buying? Let's be honest: I only see a tiny fraction of their purchases, anyway. I'm prejudging them as idiotic consumers, and with very little evidence. Worse yet, I am doing so in the very way I hope others will not prejudge me simply based on my purchase of a used car or a modest home, or my choice not to eat out at five star restaurants. It's a hypocrisy that I wasn't entirely aware of. I'd like to break the habit.


35 comments:

  1. "to the average family living in NYC, we seem like paupers." Ah yes, I wish I could get my annual spend down to $25k to 30K. My one bedroom apartment plus parking spot (yes we pay have to pay for parking) is already about $20K. And yes I am guilty of judging people as idiotic consumers as well. I can't help it.

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    1. Data points like that scare me away from trying to live in NYC, Andrew. I've visited a couple times and absolutely love the city, but I think I'm too cost averse to ever give it a go. Maybe if the missus and I can both swing high paying jobs there...



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  2. Okay, I have to admit that I would be really tempted to stay anywhere that has penguins. At least for a night.

    To be honest, I didn't think $125k out of $500k was that bad. I tend to have the mindset that if you can afford it, more power to you. I can see how it could cause some debate. As you said, many of us will never see that kind of money and jealously tends to get the better of us.

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    1. Hey EM! We did go over to see the penguins, which was pretty sweet. It's like 80 degrees out, and there are penguins chilling out by a pond with turtles in it. It's cool.

      I'm glad you're not irked by the financials of that family: that's a good way to be!

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  3. That kind of reaction definitely bothers me. Since when did spending money become a bad thing? If you've handle the important things, you're saving, you've built up a layer of security, shouldn't spending your money be what it's there for? Did they suggest that he stop making $500k? Is that bad? The people who just shout less, less, less honestly really get on my nerves. The goal should never be spending less, having less debt, investing more, or anything like that. The goal should be creating a life you enjoy. And there are many different ways to get there.

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    1. I really like this, Matt. There's also the aspect that we don't always know all of the circumstances, so it's pretty unfair to judge. Maybe the young kid at your office with the nice new car has a trust fund and he never has to work a day in his life, but still does. He just rewards himself with a nice car. We don't know all the details and judging people feels like the wrong way to go about it.

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    2. Matt: the MMM forums didn't say he should earn less, but simply spend less. Basically, to follow Mr. Money Mustache's path: spend about $2k a month an invest the rest. I agree that this is a frustrating opinion to argue against, since there is so little room for diversity. Life preposterously frugally, or get a face punch.

      Mrs. Pop: That's a great example of how our perceptions are often based on one piece of faulty data. It's really rare to know the details of someone's financial situation.

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    3. Matt,

      Great comment there. I agree. Who are we to judge anyone else? Many of us frugalists begrudge those that judge us for riding the bus or eating leftovers for lunch, yet we hypocritically will judge others for spending their money. I say live and let live. I've never claimed that early retirement is some noble cause that everyone should take up.

      My parents, for instance, have no desire to stop spending as much as they do and retire. They like their lifestyle. And as long as you're happy, that's all that really matters. Judging others that aren't as miserly only creates hatred in your own heart, and really takes away from the reason you're on this path to financial independence.

      DB40,

      Great article. Enjoyed the recycling. And it's good for the environment! :)

      Best wishes.

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    4. Well put, Jason. It's a lesson that never gets old: we should learn to be comfortable with a diversity of approaches and ideas, especially as it relates to personal finance. Many roads lead to Rome.

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  4. I like how you brought the relativity into it. Because I totally would have judged the $125k spending, too. But you gave me some perspective. I think a lot of my own judgement is born out of jealousy if I'm really honest with myself. It's not a pretty thing, and I have to temper it.

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    1. I get pretty jealous of salaries like that, too, Femme Frugality. It's hard to look at someone making and spending multiple times more than you and not have some emotional reaction.

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  5. Ooh can we all please go there? Love that you recycled a post. I might have to do that. I have so many unread ones from my early years. :D

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    1. It's no Granada, but Hawaii is still pretty nice. ;)

      Now that I've recycled one post, I think I might make it a habit if life and work gets in the way. There's a lot of stuff from the early days, when I was just writing for my wife and myself.

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  6. This is why I never post budgets as I would be scorned. It's all relative to earning power, I think people get jealous so it's easy to throw stones. I envy $150K houses, and people can't fathom $800K tear downs.

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    1. I hear you, Charles. I remember reading about one concept about being able to relate to people who are only one or two rungs above you on the economic scale. So if you spend $40k in a year, someone who spends $30k is frugal and someone who spends $50k is still being reasonable. But someone who spends only $15k a year is a crazy person, and someone who spends $65k a year has a spending problem.

      Wish I'd included that in the edit...

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  7. I have a fundamental problem with the "but they can afford it" argument. Just because you HAVE the money doesn't make a purchase a wise use of finite resources. Luxurious living is rarely sustainable.

    Sure, someone with a net worth of $10M can "afford" to have a 10,000 sqft house, but this is stupendously wasteful and selfish. THAT is why I have a problem with certain purchases. We can negatively judge many consumer objects completely out of context, because the object's very existence is wasteful. Even if they can "afford" it.

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    1. I hear you, goblinchief. But the problem I have with that approach is which luxuries get mocked, and which are acceptable. It's arbitrary, and relative.

      I can assume most (or all) of the readers of this blog have luxuries in our budgets. A lot of luxuries, in most cases (cell phones, laptops, vacation, dinner out, spare bedrooms for guests, etc. etc.) Which luxuries you judge, and which are 'approved', seems pretty arbitrary. They're all discretionary purchases and, by definition, they spend money on something that isn't necessary.

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    2. I try not to get angry about it, even though I feel for my kids (and as yet-unborn generations) who will have to deal with the impact of this all, because it becomes a mismatched circle of control vs circle of concern issue.

      That said, if someone asks me for my honest opinion *deep breath*....

      My job is related to doing new construction/luxury remodels and one of these days I'm not going to be able to bite my tongue.

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    3. We're all conflicted when it comes to our society's economy, consumerism, etc. Like the saying goes, we're all in sales.

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  8. I am fully aware this is a minority opinion, even in a frugal community like MMM, as this thread makes clear:

    http://www.mrmoneymustache.com/forum/ask-a-mustachian/is-there-any-type-of-wasteful-spending-you%27d-%27judge%27-someone-for-no-matter-what/

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    1. Lots of good opinions in that thread. I hadn't considered the social benefits of judging bad behavior (e.g. - racism). That said, you've got to hope that the judging nudges people towards the 'right' outcome. It can work the other way, too.

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  9. I got a lot of heat when I posted about Oprah trying to purchase a 40k handbag. I mean to me that still does seem absurd, even with her income level, whereas a luxurious vacation doesn't seem as out there if its relative to what you earn and save. So when it comes down to it it's none of my business....but it does make you stop and think about personal finance in general. I think as bloggers we can't help ourselves to over analyze spending situations. :)

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    1. I hear you, Tonya. That handbag is a great example of this relative cost principle. To Oprah, $40k on a handbag really isn't a big deal. Just because I think it's an extravagant purchase, that doesn't mean she should change her purchasing decisions to adhere to my values...or anyone else's.

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  10. I had to read that sentence twice about this person earning $500K per year and spending $120K. At first, it seemed unbelievable to me that someone could spend so much but as you say, it's all relative and depends on a number of factors. Who are we to judge anyway. Although I wouldn't mind a slice of pie where that kind of income is concerned! :)

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    1. Me either, Hayley! I would love to earn that kind of money. But, still, I have to remind myself that there are people abroad and in America who would love to earn what my wife and I do.

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  11. As long as people are living below their means and saving a good amount toward retirement, I don't see why they should be criticized for spending 25% of their income. I didn't read the other article, so I have no idea of what they were spending their money on. Perhaps they had kids that they were cash flowing though private schools, then more power to them.

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    1. That's true, Bryce. I think people are just suffering from sticker shock when they hear someone spending $125k. The rest of the equation almost doesn't matter, because most frugal MMM readers are spending 20% or 30% of that figure. The idea of spending $125k is so foreign.

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  12. What I've tried to do is operate expenses based on a fixed cost, not percentage. So, if for instance I know that $2000/month is more than enough for me to live a "good" life, then I won't scale that up, even if I progress in my career and make more money...

    The value of a dollar never loses its meaning, I guess is another way to put it. To me, spending more than $10/meal is splurging... I remember when I was bagging groceries for minimum wage... One meal like that was an hour of work!

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    1. That's a good way of putting it, FI Fighter. But the rub is that while $2k a month and $10 on a meal are good and absolute figures for you, those are based on your situation: living in the Bay Area, maybe single, etc. etc. To a poor person living in West Virginia, for him maybe $2000 a month is outrageously luxurious, and $1200 a month is more than enough to live a "good" life.

      As always, things tend to be relative. But I can agree with the idea that you reach a point where you get to some absolute truths. Like, trying to live on $1,000 a year in America is a poverty level existence, no matter what.

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  13. Personally, I don't think there is anything wrong with spending money... I'd say that as long as I am saving enough money, I should be okay spending a bit too, however I want. Personally, I would pay a bit more and stay at a nicer hotel (and this may not be a popular opinion, but hey different things matter to different people ;)). I can save on other things but spend where it really matters to me. It's all about a healthy balance :)

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    1. Right. We splurge on certain things, and skimp on others. Nothing wrong with that at all!

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  14. Somehow, I think I have stopped judging people, but maybe I'm just lying to myself! I continue to find hotel prices hard to stomach after years of staying in hostels. That being said, I'm growing up, and traveling with a partner, and really don't like wearing clothing on holidays (underwear yes, but fully clothed, no! So hotels it is, but at what cost and comfort level? It's so variable, by city etc. And then there's the affordability as a function of our savings (or income).

    Same 'scunginess' or thrift means I've never bought a car, but enjoyed the perks of my parents' car, my BF's car, and til 20 April, a free work car. But I won't buy one, whilst i can use pub transit, my scooter, or use someone else's occasionally (like car pooling to water polo training).

    But then I've splurged on business class airfares?!

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    1. See, I've never purchased business class or a first class ticket, but I can definitely see why someone would. It looks so comfortable up there, and free drinks, too!

      Good on you for not buying a car, too. That's a huge savings.

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  15. Love the post and glad you recycled it! (also a relief that I might be able to do the same with some of my earlier posts, which I am quite fond of but fairly sure were only read by me).

    I tend to judge others' spending as well, although typically only those I know, as opposed to strangers, and I don't really interact with anyone wealthy enough to have an excuse. That being said, that feeling of financial superiority is partially what makes me enjoy driving a well loved vehicle and try to suds up Kroger shampoo each morning. I haven't quite evolved to the point of true zen acceptance.

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    1. Me, either, Emily! You bring up a good point with the upside of feeling financially superior. We're hard wired to seek out status, and doing better financially than those around us is a way to get that. A zen-like state might be a nice-sounding goal, but is probably not attainable and may just result in frustration.

      And then there's the fact that, today, I wrote a post that basically judges people for making rent-to-own purchases. I have definitely not progressed in my thinking...though I guess some irony is always welcome.

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