My point was that to show that the only way to get this to work out was to make everything work out perfectly, from getting the authors highest quoted day rate of $1000/day on every single day of every single contract from the start. You’d also have to live an aggressively non-wealthy lifestyle without any room for things like travel, hobbies, or luxuries.
So yes, technically it can work out if the stars align, you can always get those high-paying contracts without fail, and you’re willing to live an aggressively frugal lifestyle taken to an extreme.
Travel can be expensive but it can also be quite cheap and is very dispensable.
Luxuries outside of travel (expensive hotels), I don't even know what they are.
I'm sure it's not hard to spend as much money as you want on many different things; but you make it sound as if it was necessary. It really isn't.
Kids aside, lots of things cost money. You like eating at nice restaurants? Money. Prefer to home cook nice meals? Great, equipment costs, therefore money. (And maybe ingredients).
Want to work out? Gym subscription or trainer = money. Buying your own home equipment = money. Want some form of cardio? Biking = buying a bike. Etc.
Nice clothes cost money. A nice TV costs money. Nice tech gear costs money. Etc.
And of course, travel costs a lot of money, depending on where you live.
There are obviously lots of other examples and hobbies. None of these are necessary. You can choose to be frugal with all of them, absolutely.
But - that's parent's point. Most people earning a relatively nice salary will naturally spend more money on nice stuff. That's partly because of natural tendencies to "use up" what we have, partly because of trying to be like other people, etc. But it's also partly because spending more money gives you nicer stuff / experiences, and people like them. And if you have the money, why not? There are reasons, but parent is right - you have to consciously choose to be different than normal and not spend money the way other people do when they can.
None of the things you described have to cost a lot of money. Cheap bike, is still a bike. You can still watch a cheap tv. "Nice" does not mean much, really.
If one has money then spending it is good, of course. The question is, what are we willing to give up to get more money, and for what. I would argue time is infinitely more precious than money, above a threshold -- but the threshold is very low.
But if you're a software developer like OP, then you need a computer. You probably want a second (or third) monitor. The computer probably needs to be replaced every few years, and you're probably getting a relatively expensive machine.
Add to that an office - desk, good chair, etc. If you're trying to save money, yeah, you might not be getting a fancy expensive chair. But if you have the money to spend, I'd argue it's still a good investment for your back. Etc.
Now you can consider all of these as investments, but then how much you make as a contractor has to take that into account.
(Btw, didn't get into this, but the article is missing a lot of things you need to think about as a contractor, e.g. there's often downtime between projects, sick days, insurance is usually a good idea, etc. I've been doing this kind of thing for basically 10 years, it's not as simple as OP makes it sound.)
Yes, they are.
> They are investments that can be amortized over many years.
So, they are capex rather than opex costs.
> I would argue time is infinitely more precious than money,
Were that true, the market clearing price of people's time denominated in money would be infinite. Which would be inconvenient, since largely money exists to enable the indirect exchange of time for time (largely, as labor).
This difference has existed for a long time. It's discussed at length in Max Weber's Protestant Ethic and the Spirit of Capitalism for example, which has funny things to say about the philosophy developed in Ben Franklin's autobiography.
How much have you spent on tools? Do you smoke a pipe and whittle on the front porch or something? You don't visit Rockler and buy tons of gear? Where do you get your wood, as that's not free either...
Most projects cost less than €100-200 in materials and take 3 months, so that's around €50 per month on average. Not "free", technically, but not far from free.
I cannot certainly fathom only $50/month for woodworking unless your hobby was exclusively turning small bowls and you loved waiting months for bowls to dry out.
Very little of this is strictly necessary but many people do spend money on this sort of thing without conspicuous consumption being involved. Mostly paying only for what you have to pay for is pretty much the definition of a very frugal lifestyle.
None of these are necessities but quite a few people do them semi-regularly and while some of these activities can be cheaper than others, they have costs--and, to the point I was perhaps poorly making, they're activities that a lot of people would hate to give up in the interest of frugality.
Of course, many things can also be done on a relative shoestring so long as they don't involve long distance travel/hotels. On the other hand, a lot of people like spending money on their hobbies, even if not strictly required.
Then storage, software costs, while not exactly zero, are negligible.
Printing can be expensive if done well. But I've found, nobody cares about prints (except maybe the photographer).
I think this is the disconnect with GP, $1M isn't what anyone can really call "wealthy" nowadays. Yes, it's a lot of money, but does not allow one to live what most people consider to be a rich lifestyle.
Of course this depends on location and cost of living. I am referring to someone in the US.
Edit: Specifically, does anyone (in the US) consider a $40k year income to qualify as "Wealthy"? Since that's what's being discussed here.
Even in VHCOL areas, $40K/year is fine if you own your own home and your kids are out of childcare years. VHCOL areas are typically VHCOL because of housing prices and their effect on service-provider wagss. If you take them out of the equation and only need to pay for food, gas, entertainment, utilities, insurance, and depreciation on your car, $40K/year (= $3.3K/month) is plenty.
Are you considering "childcare years" to include college? Also, in CA/IL/NJ you could easily spend $15k/yr in property taxes alone. That would leave $25k for everything else. Lastly, the average price of a new car sold in the US is $40k. You can buy used, sure, but these days even those are getting more expensive.
Somewhat. Personally I think college will be obsolete by the time kids today reach college age. It was a bubble in the early 2000s when I graduated (a significant number of my classmates did not get jobs that make back the debt they took out for it), it's certainly a bubble now, and I think the bubble will have burst in 18 years and people will realize that it's stupid to go to college.
But even if you don't believe quite so extreme predictions - the advantage of thinking in balance-sheet terms is that you set aside funds for these expenses and let them compound until you need it. I just ran a NPV calculation on 4 years of college @ $37K/year starting in 18 years with a 7% discount rate, and it's about $40K. [Note that the effect of inflation on this applies to both college tuition and the discount rate; 7% is average real (after inflation) returns to stocks, but if college tuition rises faster than inflation (say an extra 3%, which is consistent with the last 2 decades), you'd subtract that from the discount rate, and the number comes out to about $70K.] So you'd set aside an extra $40K per child when you retire, target $1.08M instead of $1M, and then you have your kids' college funds.
"Also, in CA/IL/NJ you could easily spend $15k/yr in property taxes alone."
Yup property taxes in VHCOL areas are a big issue. The math still works out though - if you take the budget yupper32 posted down-thread and subtract out taxes and rent, you're spending $1570/month on necessities and have about $1800/month for everything else, more than enough for property taxes. Or just don't live in CA/IL/NJ.
"Lastly, the average price of a new car sold in the US is $40k."
Amortized over 10 years, that's $4K/year or about $333/month, probably a little less because of time-valued discounting. That's already in the budget below - they list $300/month as car payment.
In other words, at some point you underwent lifestyle inflation and didn't realize it. And now you're unwilling to give it up.
> Of course this depends on location and cost of living. I am referring to someone in the US.
Millions of people raise families on 40k/year in the United States. These are your fellow citizens. Perhaps you can ask them how they do it and whether they are "satisfied" with that level of income and lifestyle.
I have. They are not satisfied.
$40k
Taxes - $5000/year.
Monthly budget: $35k/12 = ~$2900/month
Rent - $1200
Utilities (incl. tv + internet + phone + gas + elec) - $300
Car payment - $300
Car insurance - $90
Food - $300
Gas - $80
Health insurance - $500
Oops we're already at $2770. Hope you don't need your tires changed or have kids. Maybe you can just go without health insurance for a while. After all, having health insurance is really just the result of lifestyle inflation.
What about laundry? You have a free in-unit machine? Otherwise that's like $40/mon. You also better not have any other loans. Fell behind during Covid and took on CC debit? Good luck paying that off for 10 years. Went to school? Hope Biden cancels some of your debt, because that's the only way you're paying that off. Also, Trump era tax changes mean you now have surprise tax bills every year because less is being taken out of your paycheck. Now you have $80 in fees and counting on top of the tax bill that you still owe.
I'm not making any of that up. That's real. Why don't you talk to people instead of pretending like $40k is enough to be "satisfied"?
> Car payment - $300
Is way too high. I know it's "common", but it's also entirely unnecessary to pay that much. If I add up the cost of owning a car (purchase price + maintenance, but not gas), it has never been that high for any of the cars I've owned in the last 20 years. Not even close.
Buy old reliable cars. Even if one of them ends up being a bad deal you'll easily average out to less than $300/mo.
> Health insurance - $500
If your income is $40K/year, you'll pay less than that (if you're single).
> Rent - $1200
Assumption would be that you've paid for the place. Otherwise, this number is highly variable.
> Taxes - $5000/year.
I doubt it. Will highly depend on the state. You have various deductions, etc that will bring your MAGI down quite significantly.
I lived on the equivalent of today's $32K/year for many years very comfortably. Had hobbies, bought pricey electronics, and traveled cross country often - always staying at motels (so not camping or sleeping in the car).
> I'm not making any of that up. That's real. Why don't you talk to people instead of pretending like $40k is enough to be "satisfied"?
As noted above, I lived on less for years. I didn't even try to be frugal. I won't claim everyone will have it as easy as me, but I can assure you that I was not an extreme outlier. I hung around those with similar income, and their experiences matched mine.
Not only do millions of people raise families on $40k, they also do so while still living in NYC, SF, Seattle, and other expensive cities.
With mortgage paid off and grown kids and social security supplement, $40k is plenty of money.
Yeah totally, $40k is plenty. You just need to not have kids, have a paid off house, no loans, live in LCOL area, get grandma's inheritance, have it come from a retirement account with minimal taxes, hope inflation doesn't kill your $40k over time, hope healthcare costs don't continue to rise, etc....
Maybe in Europe.
No, in the US. Not even close. Even with a paid-off house. Certainly not before "retirement age".
Health care is the reason.
So do your mega-backdoor ROTH conversion and take out of that and it doesn't count against the insurance-company subsidy.
My out of pocket maximum is something like $7000/year. That would be painful on $40k/year, but we're talking about someone with a $1M nest egg, so unless you hit the maximum every single year, its not impossible to cover. Spending $47k/year for a couple years instead of $40k isnt going to financially ruin someone with $1M.
And sure, you may not be missing payments thanks to the $1m in the bank, but if you start eating that principle too early (=before you're 60ish years old, at a minimum) you might find yourself needing to get a job after being out of the work force for (say) 10 years and while possibly dealing with serious, chronic health problems. I'm not sure how disability works when you haven't worked for a few years due to retiring, and have six-plus figures in the bank still, but my guess would be "it doesn't", until you are, in fact, ruined.
I consider $40k/year pretty good, and definitely enough for me to live comfortably on here in Austin TX (Source: I've lived here for 13 years now, and I'm only just now getting close to spending+taxes [retirement+charity excluded] exceeding $40k as I've started spending more liberally.) I've got friends here getting by on half that.
So no, earning $40k/year as an individual is pretty good. It's only slightly over the 50%ile (but nearly double the 25%ile). Not wealthy.
However, having enough money in savings that you get $40k/year without having to work is something else entirely. A 65-year-old with that nest egg is borderline-wealthy. A 40-year-old with that level of savings is solidly wealthy.
If you can retire by age 40 and still have a higher income than half the country in your retirement, that's wealthy. Sure, you don't have a private jet, but you do have forty hours extra free time each week.
> However, having enough money in savings that you get $40k/year without having to work is something else entirely. A 65-year-old with that nest egg is borderline-wealthy. A 40-year-old with that level of savings is solidly wealthy.
Why the difference? The 65 year old is going to be able to actually draw down some of the nest egg much sooner than the 40 year old. The 40 year old will be 65 some day. Could you explain what you mean? Is it just that the 40 year may still earn/save even more money, despite not actually needing to?
It's the same a 20-year-old owning a house vs. a 40-year-old owning a house. Same assets, but the former stands out as exceptionally well-off.
Looking around, a lot of places[0][1][2] are using 10% growth - 3% inflation, so I guess the 4% is the more conservative estimate.
[0] https://www.nerdwallet.com/article/investing/average-stock-m... [1] https://www.sofi.com/learn/content/average-stock-market-retu... [2] https://www.fool.com/investing/how-to-invest/stocks/average-...
One minor downturn for that last just a few months, and you have zero income.
IMO, "US$1M nest egg, live on proceeds" requires guaranteed income, and more or less excludes speculative investment.
I appreciate that others opinions on this may vary.
I've lived through multiple major crashes that lasted a lot longer than a few months and it had no catastrophic impact on my (theoretical) ability to safely generate an income from public equities. I am having a hard time coming up with a realistic scenario where a responsible person would become insolvent investing in public equities with an expected return of 4% (inflation adjusted). And in practice, most people doing this have a hedge of some type against a protracted downturn -- the cost of the hedge is already baked into the 4% expected return.
There is no such thing as guaranteed income no matter how much money you have. The only return that can be guaranteed is a total loss since the value of all assets can go to zero. Picking a different selection of assets, including cash, is just rearranging the set of ways you can lose everything.
Most of the retirement risk is a byproduct of having inelastic expenses that run right up against the reasonably sustainable withdrawal rate. That might happen more often with only $1M in the US, but even then it depends on your lifestyle.
state bonds (free of federal tax) backed by an insurance policy are pretty close to guaranteeed income. At least that's where I put my first (and only) half-million (for a while).
> And in practice, most people doing this have a hedge of some type against a protracted downturn -- the cost of the hedge is already baked into the 4% expected return.
All true if your goal is to generate a 4% return over the long haul. Not so easy if your goal is to generate a reliable 4% income stream. The 4% return, reinvested, will be smoothed out over time, and if things are planned well, achieving that over the long haul should be fine. Pulling 4% out of the investment every year, on the other hand, is much harder to cover with hedging.
Remember, the goal in this case is not to generate a 4% average return over the lifetime of the investor. It's too generate an annual income of 4% of the investment value, without ever depleting the investment value. These are not the same goals.
The fiscally conservative mindset is that in a downturn, dividends shrink. At the same time, being forced to sell securities to cover living expenses means "losing" money from your nest egg, not living off of gains. Someone with this view would be balancing their portfolio to have enough cash and/or bonds to support them through some unknown future, and only expect to sell stocks when the market is doing well, to realize gains. Then, one needs to consider the rate of return of such a safe portfolio...
For example it it is not enough to retire when older and live a moderate lifestyle in New Zealand.
Firstly, you need to own an average home in the city you live in. Don’t move away from your friends. Don’t live in a dangerous suburb. I live in Christchurch where I was born, median house price: $693,000 (Wellington and Auckland are a lot more expensive).
Secondly, you need residual income from investments. New Zealand pays superannuation to everyone that reaches retirement age*, but it is not enough to keep your home warm or go to a café every day.
The figure I aim for is NZD2M. $1M buys a median home in a desirable suburb (7 suburbs in Christchurch have a median price over 1M), and $1M is left to invest. I am middle aged: the amount you need to aim for goes up drastically if: you are younger, you live in an expensive city, you live in an expensive country.
NZD2M gets a comfortable retirement at present. It definitely doesn’t get a “wealthy” retirement (no holiday homes, no wealthy holidays, no flash yacht).
* retirement age is currently 65, but is likely to be increased because that is unaffordable for the country as it currently is economically.
I am, for example, a native of British Columbia. My home town, a humble one, now has an average home cost of $1M CAD. $1M will certainly not furnish retirement in any above-average Quality Of Life situation. "Wealthy" isn't living an average first-world lifestyle...
Average isn't great, I wish they reported median, but anyway that's about 6% of a million, which is a pretty aggressive number.
We have a hundred years of investment data in the United States that says this isn’t true.
A 10% withdrawal rate will lead to portfolio failure 50% of the time after about 14 years. You can calculate using historical data here: https://engaging-data.com/will-money-last-retire-early/
There are mountains of research showing the safe withdrawal rate for retirement is around 3.5-4%. A million dollars gets you $40K per year at most, not $100K per year.
Anyone expecting to live off of $100K/year with only $1m invested is in trouble in about a decade, even if they could get a mythical reliable 10% return.
Note that due to inflation and downturns, you cannot withdraw an amount equal to the interest you earn. You have to withdraw significantly less than the interest you accumulate.
An average over extended period of time. Maybe my fried is lucky and it's only been 3-4 years of such return for him
https://www.investopedia.com/ask/answers/042415/what-average...
But... the real, foundational difference between being rich and not is not any particular consumption choice but the way one relates to wage labour. The difference in the daily, weekly, and annual rhythms of my life and that of someone making 2-3x as much but with a similar ratio of housing costs to income, savings, etc. are broadly the same. Similarly, someone making half what I do, probably also with a house they're ok with in a ok-ish area which is paid for with a mortgage, has basically the same life I do. Certainly within the broad spectrum of global and historical experience our lives are almost identical and it takes people who are highly attuned to differences in consumption markers (which all humans are within their own societies) to spot them.
The very poor and the very rich have different rhythms of life that put them outside of this mainstream but 75% of the population lives broadly similar lives.
We all get up at some point in the morning five-ish days a week, timed to meet a regular or externally constrained schedule (even freelancers have to be available within certain hours). We have clients or bosses who we have to please in some way or another. Some of us have very good relationships with these people, maybe we run our own businesses and have substantial independence from clients or shareholders. Some of us on the end have a rigid relationship with a boss who sets an hourly schedule.
We go on a thing called a "holiday" (or a "vacation" which is what I believe Americans call the thing they're not allowed to take). If we are lucky, this is to a warm/culturally interesting/snowy place and we do it two or three times a year. If we are less lucky we go on one a year.
Our continued ability to live in our homes and eat is dependent on this way of living.
The little labels on our possessions and how big they are vary, but imagine explaining the real differences to someone from 1,000 year ago. "This man wears wool clothes and goes to a place where he makes phone calls and does things on a glowing screen. This other man wears other similar looking clothes and he goes to a place where he makes phone calls and does other things on a glowing screen. Banker or call centre worker? The one that is high status can expect their boss to require them to work at a moment's notice in the middle of the night."
Compare that to someone who has a potentially substantially lower level of consumption and no longer engages in wage labour for their sustenance needs. Whether they spend their day reading, staring at the clouds, swimming, or flying their private plane is less important than the difference between them and someone who has to work.
1. People who need to engage in wage labor in order to survive.
2. People who can deploy resources essentially at will to meet essentially arbitrary goals. This means buying stuff, capital investment, etc. etc., with the limits significantly beyond what (say) a 10x median income person might be able to manage.
3. People for whom neither 1 nor 2 is true.
I don't think we have a great term to describe the third category. Simply by not needing to engage in wage labor, such people are in many ways "wealthy". But lots of the connotations of "wealthy" are related to the second category, and they don't have these abilities either.
Why do you think that? All the numbers work out. Even in your hypothetical scenario, investing 100k for 7 years, especially in the last 7 years, would easily bring you 1M total investments.
> FIRE type wealth trajectories are possible, but this isn’t what it looks like. Working normally-paid jobs for 7 years and just living your normal life doesn’t get you there.
This is exactly what FIRE is, and again, using numbers from your own post, which I think are reasonable, this is exactly what it looks like. 1M invested, 25k/yr expenses = 40 years with no gains in investments, people into FIRE usually assume 4% growth, so he would be even better off. If that isn't FIRE, I don't know what is.