Monday, October 21, 2019

Way Too Transparent: All the Money We Made

Whenever someone asks me how we're able to even consider hitting financial independence or an early retirement by the time I'm forty, I try to be honest. I try to avoid the temptation to tell them it's because we drive a paid off car, that we use our bikes or scooters when we can, or that we budget and watch what we spend on food.

I try not to tell them it's because we travel hack to get cheap travel, or that the things we like to do, like board game nights with some friends and a twelve pack, end up being cheaper than hopping from bar to bar.

Not that those things aren't true. They are, and to some small degree they do save us money. I just think leading with those details of frugality is, well, kind of misleading.

Our frugality, to the degree that it matters, is secondary to what I like to think is an open secret when it comes to financial independence: that most people achieving this goal are doing so because they earn more, often much more, than the median income.

But here's where things get tricky. While I have always tried to be honest with the handful of readers who come here, I also value our privacy. It's a bit of a paradox. I've written anonymously so I can be open, but I also keep things close to the vest because I worry about how people would react if they really had a good idea of our financial situation. 

Would we seem like rich, privileged assholes?

What if some enterprising troll was able to figure out our identities?

Still, I'm trying my best to get over these sort of thoughts. It's scary to open up, but I think it's probably a worse thing to tiptoe around key aspects of our story, always being a bit worried about what people might think. And I've been inspired by a blogger friend who's written about the importance of transparency.

So if I believe that our income is the main reason we're able to work towards financial independence and an early retirement, shouldn't I be able to speak to that with some specificity? Might it even be helpful for others to see exactly what we talk about when I say that a rising income is the thing driving us to financial independence?

So let's talk about that a bit today. 

Dig in, voyeurs. Below is all the income Mrs. Done by Forty and I have ever made from our jobs

Click for bigness
So let's give a little context to that eye chart.
  • We pulled the numbers from Social Security records, and updated the figures to add back in our contributions to our HSA. (Fun fact: money you contribute to an HSA is not taxable for Social Security.) All income figures are rounded to the nearest $100. For clarity, these numbers don't include 401k match, stock purchase plan benefits, or rental income.
  • Just to walk through some of the figures: I worked a bit on the weekends and after school during high school (1994-98), mostly so I could buy clothes and go to movies and, later, put a little gas in the car
  • After two years in undergrad I dropped out in 2000 to move to California, working at the Red Cross during the day and Hollywood Video at night for a year, until I got a job at the state university in 2001. This job didn't pay much but did have amazing benefits, like completely free tuition. The school accommodated working students, so I was able to take 12 class credits in the evenings to finish my bachelors degree (thanks to once-a-week, three hour classes).
  • I stayed in this job through 2009, earning my teaching credential along the way. I figured staying at the same job was a good thing, not realizing the significant opportunity costs of staying with the same organization, especially when my starting pay was so low and raises at a government job were hard to come by. 
  • After dating for a couple years from 2007-09, yet-to-be-Mrs. Done by Forty and I moved to Arizona so she could pursue her PhD. After teaching in Arizona for a hot second, I moved to the private sector and immediately saw a big jump in pay. 
  • After a promotion, our combined salaries got over $100k, well above the median household income in 2012. This just happens to be when we stopped listening to Dave Ramsey's advice, and started getting curious about financial independence.
Is it a coincidence that we started making big financial wins, like becoming debt free, paying off a house, buying rental properties, and making quick progress to financial independence, right when our combined income was greater than average? Maybe. 

Maybe the progress was more due to the tips we picked up from Mr. Money Mustache. Maybe we would have been able to achieve all of the same things even without the added income, just through increased frugality: maybe more hang drying of our clothes and more bike rides would have made up for the lower income.

In our case, I think that's nonsense. The income is the driver of our financial independence, and it always has been. Frugality is a nice tactic and, believe me, I understand the logic that the frugal rich like to employ in these discussions. Well what about people who earn six figures and are still living paycheck to paycheck? They can't earn their way out of bad spending habits, right?

There's certainly some truth to that. If you're always going to spend whatever you make, then you can never earn enough to get ahead. The problem with that logic is that people earning six figures can dabble in frugality, read a few blog posts, and be making significant progress towards financial independence almost immediately. For them, frugality really does seem like a magic bullet because that one change shows huge results. Going from spending $100k a year down to $60k puts them on a fairly fast track to riches with what likely seems like very little sacrifice at all.

But with these case studies, the high income is there in the first place. It's easier to take it for granted when the big income was the constant and the frugality was the variable: of course we might ascribe causation to the changes in our spending.

But having an above average income is far more important, because no amount of penny pinching tactics matters when income is average or below average. When we were in San Diego, no amount of bike riding or clothesline drying would have made a dent in my student debt. No amount of budgeting was going to make material progress towards our financial goals.

And while I'll concede that moving to a much lower cost of living area has certainly helped, the kind of money we started making in 2011 would have been plenty to have us on a path to financial independence in San Diego, too. 

As I've said before, I don't think financial independence is possible for everyone. Incomes aren't high enough for huge swaths of our populace: for a myriad of reasons, employers aren't paying workers enough, and the wealth from profits is going to shareholders instead of employees

Because of a bunch of factors, not the least of which are the specific advantages I have from being a man who's half white and half Asian, our family has been able to buck that trend, even while one of our earners was pursuing a graduate degree and was only being paid for part time work. The median household income in 2018 was $63,179, meaning that without both of the adults in our house working full time, we made more than double the median income last year. Now that Mrs. Done by Forty has her new position, we'll be making quite a bit more than that.

That is the reason we're able to talk about potentially retiring when I'm forty. It's the income. Duh.

I suspect that's also the reason that so many others find these goals so hard to make progress on, despite being more frugal than I am. Despite eating out less often and avoiding car expenses, not because it's a great way to stack up cash, but because their income dictates they have to.

I don't want to sound like money management and watching costs doesn't matter at all. Clearly, these are foundational skills for personal finance.

But I don't want anyone reading this blog to feel like they were sold a false bill of goods. I don't want them thinking that they weren't able to retire at some ridiculous age because they weren't frugal enough; that they had treated themselves a bit too often. Because I don't think that's the real reason in most cases.

Most of the time, it's because employers just aren't paying their workers enough to cover expenses and to still have enough left over to pay down debts, and invest the kind of sums necessary to reach these sort of lofty goals.

And financial independence is a lofty goal. We're talking about having the ability to make work optional several decades before a typical retirement.

So if it seems like you're busting your tail and you're not making the kind of progress that you want to, or if financial independence just seems totally out of reach, maybe looking at the kind of salaries we were taking home during this time provides some helpful context for how this was possible for us. How we are lucky, and super privileged in all sorts of ways, and have not brought home average salaries for the better part of the past decade. 

If income is the problem in your particular household budget, maybe pushing for even more frugality is not the answer. Maybe it's applying to different positions: all of my material raises came from when I moved to a new company. Maybe the answer is education or training. Maybe it's a side business.

And if it's that sort of situation, maybe part of the answer is giving yourself a break, too. 

*Photo is from MIKI Yoshihito at Flickr Creative Commons.

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  1. Hey, I wrote a pretty similar post today. But I'm on the other side. I think you need to learn to be frugal first, then focus on making more. It's a smoother transition. Most people make good money, but couldn't save. Check it out.

    1. I really liked your post, Joe. I don't actually think we're on the other sides of the issue. I agree that income, especially in any given year, is finite: as limited and real as our expenses that year.

      I just think that for those making big financial progress, like working towards FI, that their income is the driving factor, not their frugality. Both have a role to play, but I think their above average income (often 2x or more the median) is primary.

  2. I appreciate the openness. I think it's finally coming to light that it's not so much about the daily frugal habits that contribute to FIRE, but income. I don't think that gets through to think engineering skulls. lol! Ideally, like you said, it's the perfect combination of the two. But coming from someone who has made shit income and good income (not at all linear either), being frugal by choice is way better than HAVING to be frugal.

    1. Thanks, Tonya! I agree that more people are realizing that FIRE sure seems to have a lot of high income people in it who just also happen to be frugal, rather than frugality being the driver.

      And YES, it's totally different to be frugal just to save more in your tax advantaged accounts than to be frugal just to make it to the next month. If frugality was the driver, we'd see a lot of working poor, who are far more frugal than me, getting to financial independence.

  3. Voyeur here loves this �� I like how you call it the “open secret,” because that hits the nail on the head.

    When you’re ALREADY driving a beater car and living in a small space to make ends meet, selling the car and trying to downsize just isn’t realistic, nor will it make the kind of impact that selling the Benz and downsizing from the 3,000 sq ft home will do.

    1. Thanks, Angela!

      Love the insight that when you're already frugal, more frugal than most FIRE bloggers, too, then the advice they dispense isn't all that helpful. The "frugality for the win" advice is geared towards a specific type of household: a high earning household that hasn't been watching their spending. That's kind of it.

      Glad to hear I'm not the only voyeur out there. Maybe we'll bring back some of our old Budget Porn posts. ;)

  4. Wow, you did what I haven't been able to bring myself to do: disclose my income to my readers. Good on ya! I do think it's an important discussion to have because we all need to be cognizant of the fact that income in a big driver in financial independence. There are the few exceptions to the rule who reached FI on teachers' salaries or whatnot. But most really big-time FI folks earned a lot of money in their heyday. And while we know that intellectually, it's hard to remember when they're inundating you with frugal tips. You start to think that frugality was the real key to their success rather than one prong. It's true that you probably can't reach FI if you're not frugal -- unless you're making huge sums -- but frugality is rarely enough to get to FI.

    1. Hey there, Abby!

      I appreciate the kind words and, yeah, was definitely nervous to hit publish on this one.

      I agree there are some people who make FI happen on low salaries but I think they're the outliers: the majority seem to be making well above the median household income of $63k.

      There's some widespread frugality, too, and I hope I wasn't discrediting it as a factor: but I tend to think frugality is a red herring. It's something people do, but it's along for the ride, rather than driving the car.

    2. As a low income earner struggling to figure out if FIRE is an option for me all I can say is thank you. Knowing I just need to increase my income takes off some of the pressure when I want to buy real fig Newton's but feel I'm sacrificing early retirement by doing so.

    3. Thank you for that very kind comment. I had a fairly average income (and probably a low one for San Diego) for my first decade of work. It took a geographic change for me to realize the opportunities I was missing out on for more income -- hopefully other people recognize if that's the problem they have earlier than I did.

      And yes, there should always be room in the budget for fig newtons now and again.

  5. Thanks for the perspective on frugality and your transparency with your income.

    I see that you've paid of your mortgage (congrats!) in a relatively short period of time from your earning years, what was your main motivation to accomplish that?

    It's also inspiring to learn that you then bought 2 rental properties afterwards. Was it difficult to pay 2 mortgages at the same time?

    1. Hi there, Mama Bear. Thanks for stopping by the blog and commenting!

      We actually paid off our mortgage twice: once on each home. The first time it was just due to being in to Dave Ramsey at the time (we've since changed our minds on him). The most recent time was just this summer, and the short answer to why we did it was sequence of return risk is bad for early retirees. More thoughts here though:

      To be honest it wasn't difficult paying those mortgages for the rentals. For one, they were very small (I think each mortgage was $72k and $62k respectively, on a 30 year fixed, so even with the higher property taxes for investors, the total mortgage payment for each was under $600 or so.)

      Ultimately we sold both rentals as the juice wasn't worth the squeeze. We were making money but not enough to justify the headaches and the risk inherent with property (repairs, vacancy, liability and potential for lawsuits, etc.) We're both happy to not be landlords anymore, but I know a lot of people who think it's the very best investment around.

  6. Way to be transparent. That's very cool. I met some folks at a party Saturday and the work optional topic came up and I shared with them that the primary driver was my income and not frugality - just slightly less than ridiculous spending habits and buying much less house than I could get a loan approved for (though I still live in what I think is a lovely home in a killer location). Cheers - keep up the good work.

    1. That's really cool that you all were talking about work optional at a party, Liz. I feel the same way now about our situation: that it's really not about making big sacrifices on our part, though I'm sure that's probably what people see from the outside if they looked at our car or our fixer upper first home.

      It's the income, but people can't assume that, because they can't see our income, usually.

  7. Wow thanks for this post and for your honesty and transparency! For the longest time I tried to focus on the frugality part, especially because it's very unlikely I'll be hopping into a new job and huge salary jump anytime soon. I feel very strongly that it's more than possible to live in an expensive area like DC and have an extremely comfortable life while also saving not an insignificant amount of money and I try to show that! But frugality can only get you so far. It's why I picked up a weekend job two years ago to increase my cash flow, even if just by a little.

    It's been driven home since I started dating my partner, who's also on the FIRE path. He's making ridiculous strides, and it's so exciting to watch! But he's also making twice as much as I am, and I have to remember that when I get frustrated with how looooooooong it seems to be taking me to reach the big significant net worth milestone I'm currently working towards. It's probably best demonstrated by the fact that it would take me probably 17+ years at my current income/spending to be financially independent. When my partner and I forecast out with our combined current assets/incomes, that drops dramatically to 5-7 years. The income matters!

    And now that I've written half a blog post here, perhaps it's time I actually write a blog post about this, haha.

    1. Hi there, Erin! Thanks so much for stopping by and for the very nice, but not too long, comment.

      I agree that it's possible for a lot of people to make progress without a huge income: I think a lot of people's incomes probably fall in to that range where they still can make progress, like you said, but maybe not as quickly as they'd like.

      The comparison between 17 years and 5-7 is just so stark: it really shows the huge impact that big salaries can have.

      In our household, we have a similarly disparate income situation and it's tied up in so many issues: the wage gap, discrimination, the financial advantages couples have (especially married couples). There's a lot going on there, for sure. I try to imagine what it would be like for a single woman like Mrs. Done by Forty trying to pursue the same goals: how much longer would it take. Could she even make progress?

    2. Thanks for your post! I found FIRE at around age 54. Income + frugality + luck made it possible to downsize from corporate job to working part time, at age 58. With SF bay area cost of living, and my income as a single mom with 2 kids, it was very hard to save until I was about 50. Started making around 90K a year then, received an inheritance, and was able to refinance to save thousands on annual mortgage costs. Then hopped up the 401K contributions to the max. Now have 1M and a small pension. Without those factors, I would still be at corporate. Life is much better now - I sleep until I'm rested, and I'm even able to take my dog to work :-). No more hurtling to and fro. I keep several days a week 'to myself,' very low-key.

      Without the moderately high income and savings and inheritance, there is no way I could pull this off. Health care (12K/yr), insurance and property taxes (12K/yr) gobble up most of the pension. I work part time in a small office to pay for the rest, until Medicare, and then Social Security, kick in.

    3. It looks like my blog ate my first reply to you yesterday, so sorry about the delay.

      First, thank you for the very kind comment and congratulations on your achievements. Doing that in the Bay Area (where Mrs. Done by Forty is from) with children, as a single mom, is incredible. You should be proud.

      We also plan on having part time work (or volunteering) being a part of our post-FI life: we think we'll find that sort of variety in our days and weeks will be really critical, and meaningful, too, hopefully.

      Healthcare is the big question mark in our calculations. For now, the ACA will be our plan but there's so much uncertainty on the plans & costs, year to year.

  8. SavvyFinancialLatinaOctober 28, 2019 at 7:21 AM

    I'm 29.5, and my husband is 30 years old. I was lucky in some sense that I discovered personal finance when I was 21-22.

    But our income didn't really start to grow until about 2 years ago when I took a higher paying job and my husband, also, started making more money due to a job change. Granted I had a high paying job right out of school, but my husband did not. So in the end in sort of averaged out. We were saving, making progress, but now when I see our future 10 years, if we keep our current income at least, our net worth will be growing quite nicely. Income does matter. Savings matter as well.

    1. "Income does matter. Savings matter as well."

      Oh, for sure. You need both. I just think that income is more critical. For many households, they do not earn enough to achieve financial independence, regardless of frugality tactics. And for many high earning households, some very small changes to their behavior will yield almost immediate results and a path to FIRE, if they want.

      Glad to hear that your income started jumping up recently. Our path was similar: it was a move to higher paying jobs outside my current company that really started the change.

      Job changes FTW, right?