Apr 26, 2011 49 comments

Why Hardcore Saving is much more Powerful than Masterful Investing

“Hmm. In this case, Mr. Money Mustache has outdone me.”

I was recently enjoying a conversation with a new friend. Despite my best efforts to sound normal and busy, this person eventually figured out that my wife and I don’t actually do enough paid work to sustain the normal middle-class life we seem to lead. From here he pried out the fact that I am Mr. Money Mustache, the freaky magician who retired at 30. When people learn this, they immediately start grilling me on my presumably amazing investment skills. You have to be a stock market wizard to retire unusually early, don’t you?

Unfortunately, I have a pretty poor investment record myself: as an early twentysomething I thought I could pick winning stocks, and ended up buying some that went to nearly zero. These were balanced by some that went up nicely, and these experiences combined to average out to about the same return the stock market as a whole would have given if I had just bought a nice index fund. Through my later 20s and 30s, I thought I was wise by squirreling lots of money away in the excellent Vanguard 500 (VFINX) index fund. But then Great Recession happened and (temporarily) backed out all those gains. I did make some reasonable money from home ownership and managing a rental house, but most of that was earned by increasing the value of the houses with old-fashioned sweat equity: renovations I did myself. In investments, you will win and lose on average, and statistically the best you should expect is to match the market (historically about 7-8% annually after inflation is subtracted out).

But let’s hypothetically say you were a masterful investor. The best investor in modern history, Warren Buffett, has averaged investment returns of about 20% per year for over 40 years. This is about 4 times higher than the laziest investor who just bought guaranteed-return bonds.

Now let’s say you are a masterful middle-income saver: you are married and you and your spouse earn $120,000 combined per year – say $90,000 after tax. With skill, the two of you can save at least $50,000 per year of your combined income between regular and retirement accounts.

Next, compare this with the average personal savings rate in the US:
– 6% right now (which is actually higher than usual because we are in a recession),
– as low as 1% during the big credit and spending boom of the mid-2000s.
An average couple would save less than $5000 per year.

So the difference between average and amazing investors is 4-to-1.
The difference between average and Mustache-level SAVERS is at least 10-to-1!!

So over the short time horizon we are talking about (7-10 years to retirement), you’ll get much better results by learning from this Blog (working on your spending), than you will by trying to be a fancy market-beating investor. That’s why I often repeat the message of “just pay off all your debts, than start throwing it all into the Vanguard index fund”.

Sure, it will go up and down with the broad stock index, but these are your retirement savings. You’ll be living off of them for the rest of your life and while we can’t predict the future, we CAN choose the statistically best place to get a high long-term return. And that place is in a low-fee index fund.

Also, by wiping out your debt (including mortgage) early on, you are effectively investing in some guaranteed bonds: paying off a 5% mortgage guarantees you a 5% return forever*. With no mortgage or other loans, my family’s fixed costs are only a tiny fraction of what the typical indebted person needs to pull in. So there is lots of flexibility in when to sell off portions of the index fund for future living expenses. And the dividend checks keep coming every quarter, rain or shine.

Back to the point: by concentrating on SAVING rather than minute details of investing, you are stacking the odds in your favor while also freeing up time for the real deal – maximizing your fun in a cash-efficient way.

* Although this is not an inflation-adjusted number, since if you leave your mortgage unpaid forever, the remaining balance will eventually deflate away to a very small number relative to the cost of other things. In other words, you may be able to pay off your $150,000 mortgage when you’re 100 with just the change in your wallet. But even 5% before inflation is still a good guaranteed return with today’s treasury rates. Cautious people like me are still wise to pay off their mortgages early.

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Michael Keel May 28, 2011, 1:37 pm

Enjoying your site. Got here from ERE.
I do like your attitude.
What happened to your mortgage?
That would be a good story or maybe I missed that post!

Reply
buzz September 22, 2011, 7:41 am

Feel free not to publish this, but I just wanted to warn you about index investing. That note in every stock’s annual report: “Past performance is no indication of future returns” is just as valid with indexes. I’d encourage you to read Jacob’s thoughts on index funds: http://earlyretirementextreme.com/the-major-risks-of-buy-and-hold-index-investing.html

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- MMM September 22, 2011, 9:30 am
  
  Thanks Buzz! I am more than happy to publish that.
  
  I think Jacob’s point is that if everyone blindly piles into index funds, the values will rise irrationally and thus not reflect the underlying dividends and earnings. In other words, we will all be buying like sheep at an overly high price-to-earnings ratio.
  
  But Jacob’s article was written in April 2008, when the market was 20% higher than it is today, and the earnings were 20% lower. The old sages of long-term investing suggest that buying higher earnings at a lower price is the real predictor of future returns, rather than focusing on share price alone. Some of the other little articles in the MMM “Investing series” talk more about this idea.
  
  I’ll read a bit more on Jacob’s ideas on value-in-the-whole-index and then ask him in person too.
  
  Reply
Katie October 16, 2011, 5:24 pm

Just started reading your blog in chronological order and am really enjoying it!

Question: you talk a lot about Vanguard index funds; is that an American thing? Any suggestions for Canucks?

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- David April 23, 2014, 1:08 pm
  
  Not sure if you will see this but Vanguard has gone into Canada in the last couple years. They have several ETFs that are traded on the Canadian stock exchange.
  
  Reply
burntout October 24, 2011, 1:07 pm

Average personal savings rate of 6% in the US! Dear God, where does the remaining 94% go?? I am shooting for a little more than a 6% savings rate. Here’s hoping I can make it happen.

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Agent9 January 12, 2012, 4:22 am

‘…paying off a 5% mortgage guarantees you a 5% return forever’

This is before inflation. Should we adjust this number for inflation since we are comparing it to market returns of 7% after inflation?

It will only return 5% until the end of your mortgage period as well. If you are 15 years into a 30 year mortgage then any payments will return 5% before inflation for the next 15 years.

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- MMM January 12, 2012, 9:31 am
  
  Thanks, I fixed that detail with a footnote.
  
  Of course, the discussion could get more and more complicated: the 5% mortgage interest savings is better than a comparable 5% dividend, since it is effectively a non-taxable return (people enjoying Mustachian retirements are in a low enough tax bracket that they don’t benefit from the US mortgage interest deduction). And regarding the 15-year payoff: it is always possible to NEVER pay off a good chunk of your house by opening a line of credit and leaving the balance unpaid (pay only the interest).
  
  Still a good point nonetheless – thanks.
  
  Reply
  - Agent9 January 12, 2012, 10:03 am
    
    That’s a good point about the non-taxable return.
    
    I disagree with your point about using a line of credit to extend the life of the loan. That’s like saying a 5% return on a stock is 10% better than a stock that lost 5%. Remember that all mortgages only have the percentage cost due to the fact that they are amortized over a set period of time. Once you extend that time period you effectively change the rate.
    
    I hope this makes sense and doesn’t come off as being argumentative. I learn best through vigorous discussion.
    
    Reply
    - MMM January 12, 2012, 10:39 am
      
      Really? I don’t quite understand your point about how a line of credit is different from a mortgage. But since I don’t understand it, that does mean I could be wrong. Do you have a link to a longer explanation somewhere online where I could learn more about what I am missing?
      
      Here’s how I see it: Say you have a 200k house, paid off. Inflation is 3%. You can borrow money at 4%. Investment returns are 5% before inflation. To be simple, assume you can borrow 100% of the value of your house.
      
      If you take the full value of your 200k house and invest it somewhere a 5%, it will beat inflation.
      
      Meanwhile, you continue to pay only the interest on the line of credit. After 30 years, the balance feels like $200k/(1.03^30) which is about $82,400 because of inflation. Meanwhile, the borrowed principle generated enough cashflow to pay this 4% interest charge, and still grow at 1% before inflation.
      
      Since the outstanding house balance did not grow at all, and the invested principal grew at 1% after paying for the borrowing, the person came out ahead, right?
      
      Or even more simply, is my argument still incorrect that you can leave a balance outstanding forever and let it deflate away, assuming an imaginary world where the variable rates on a line of credit do not fluctuate in correlation with the federal funds rate? (or is THAT what you are talking about – the unpredictable variability of interest rates?)
      
      Reply
      - Agent9 January 12, 2012, 11:44 am
        
        The point I was trying to make about the line of credit versus the mortgage was that the line of credit doesn’t extend the mortgage beyond 30 years, it’s basically a new loan.
        
        The example you just posted talks about leveraging your house to invest and making a profit off of the spread in the two rates. My comment was in response to this part of your post:
        
        “…paying off a 5% mortgage guarantees you a 5% return forever.”
        
        My point was, your mortgage only lasts a fixed amount of time, say 30 years, so paying it off will not return 5% forever. It will only return 5%, before inflation, over the remaining life of the loan at the time you pay it off.
        
        Reply
        
        Curran Bishop August 1, 2016, 9:23 am
        
        I’m 4 1/2 years late on making this observation, but I just wanted to complement the tone of this exchange: it’s really refreshing to see people working out an understanding rather than just hack off at each other like most forums.
CG January 25, 2012, 5:43 am

MMM,I’m sure this question has been put to you before somewhere on your blog but I’ll ask it anyway. How do you justify investing in funds that fuel things you rail against on your blog?
I have a significant amount of money I could invest but I don’t want to profit off of the consumerism and poor health choices of others or Big Oil and Big Pharm. Taking a quick glance at the Vanguard 500, those companies are in the top 10.
Is there some mathy way that they don’t actually benefit from your investment?

Reply
- MMM January 25, 2012, 9:19 am
  
  Good question! It all depends on your strategy. If your goal is to use your money towards social change, there are several options. One is to avoid investing in socially destructive companies – this effectively raises their cost of capital ever so slightly, which will tend to slow their growth. You can do this by only buying “socially responsible” mutual funds.
  
  From the reading I’ve done, this “investment boycotting” tends to have a small effect compared to making changes on the consumption side. If you avoid BUYING things from the companies you don’t like, you make a much bigger difference by hitting their revenue stream, than you do by hitting them on the cost of capital side mentioned above. If you further make a point of writing letters to the company, and to newspapers, and organizing other consumers to pressure the companies to change their practices (tell Exxon to stop lobbying against climate change action, for example), you have an even bigger effect.
  
  You also have a big effect by voting for political leaders that value social equality and environmental concerns higher, and allow a lower level of cronyism and corruption. All of their problems aside, in the US this clearly points toward the Democratic rather than Republican party.
  
  When investing, I tend to seek out maximum return without too much regard to the companies that happen to be in the stock market index as a whole. Then I use these returns to give me the free time to make social change on my own. As odd as it may sound, this blog has allowed me to make much more change towards a more equal society than I could ever make by just buying socially responsible funds or living off the grid.
  
  Reply
  - drf February 9, 2017, 10:54 am
    
    New Robo-Advisor that automatically builds socially responsible account for you.
    
    https://www.bloomberg.com/news/articles/2017-02-09/a-new-robo-adviser-lets-you-build-portfolios-that-shun-guns-and-oil-shares
    
    Reply
  - Mustafa April 19, 2017, 3:35 pm
    
    Seriously? This is wrong on so many levels.
    
    1. If you truly care about the environment your goal would be to maximize your overall impact, not justify being a hypocrite by claiming your net impact is still positive.
    
    2. If you truly cared about the environment, there is no justification for investing in these companies simply for financial gain, when you could either not invest, or take the time to find alternatives that may give you less of a return.
    
    3. Voluntarily being involved with these companies at all both contradicts your values and contributes towards the problem.
    
    4. Part of your justification is the claiming the impact of investing in them is small, but the impact on their revenue stream is big. No, your personal impact on both is incredibly small, so comparing the relative difference between them is futile. It should be about your values and doing the right thing, and not the incredibly small impact you are actually having on the problem.
    
    I haven’t seen such a blatant example of being a hypocrite in a while.
    
    Reply
    - Francisco Fiuza April 26, 2017, 11:46 am
      
      I kinda of agree and disagree. If you take this line of reasoning to the extreme, you wouldn’t even eat out, because conventional farming uses lots of fossil fuel. Would you be a hypocrite for having a smartphone that was most likely explored “slaved” labor?
      
      You have to define what’s your limit, how far are you up to, and you stick to it.
      
      To clean the pigsty you must step on their shit, mud and dirty. You have to get a bit dirty to clean it.
      
      Reply
- Katie January 26, 2012, 10:23 am
  
  I’m really struggling with this ethical conundrum too. I don’t want to invest in big oil, pharma, defense, junk food, cigarettes, etc. I would feel like a hypocrite…I want to put my money where my mouth is.
  
  Currently I have my RRSPs invested through a really good advisor (this is before I started reading about low-cost DYI investing). I consider him “good” because he is willing to explain things well and values transparency – he discloses any benefit he will gain from anything we do, and points us to lowest cost options. He was also respectful of our wish to try ethical investing & he found us some reasonable options. The result has been that the returns are lower than your “regular” investments, but not by a lot…our advisor was pleasantly surprised.
  
  Another way we’ve been experimenting (ie, only using money we could “afford to lose” without much pain) with ethical investing was to buy some stocks in specific “green” companies (mostly wind, geothermal, LED tech, etc). Unfortunately we bought high on all of them and they have all taken a nose-dive since. We learned our lesson on picking individual stocks. I consider that money gone and will wait to see what happens over the long run.
  
  I do want to invest in low cost e-series index funds though, but I don’t know how to do it without investing in the bad guys. Any suggestions?
  
  Reply
  - Mustafa April 19, 2017, 3:40 pm
    
    What’s the dilemma? There’s no getting away from the fact that you would be a hypocrite if you invested in them. So either you are ok with being a hypocrite and undermining your values, or you aren’t. You could always just not care so much about the environment, admit that to yourself, and then invest in them, thus avoiding being a hypocrite. There is no justification for voluntarily investing in a company you consider to be evil and destroying our planet, just to maximize your financial gain. I mean, seriously?
    
    Reply
- Devin May 14, 2016, 5:13 am
  
  I realize that it’s now four years since you posed this question, but Darrow Kirkpatrick of Can I Retire Yet? authored a comprehensive article on socially responsible investing (SRI), complete with pros, cons, and available investment options that meet this criteria.
  
  http://www.caniretireyet.com/socially-responsible-investing-worth-the-price/
  
  Reply
Vick Desai September 17, 2012, 5:19 pm

Mr MMM.

I’ve been reading from the first blog on wards, and I have to admit, I’m now a fan. I truly enjoy the objective advice you are offering. I’m a recent college graduate who started working back in May. I finally saved enough in my stash to open a vanguard account. Instead of choosing the VFINX fund I decided to choose the VBINX due to it’s asset allocation. Although this may not be as aggressive as the VFINX fund, what are your thoughts on this particular fund?

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Andrea October 11, 2012, 1:44 pm

when i started reading your blog i was sure that i would have to become an investment guru. i still plan to learn a lot more about investments but this post – “Why Hardcore Saving is much more Powerful than Masterful Investing” – has put my mind at ease. i really look forward to being student loan debt free (the only debt i have) and retiring early.

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Ed Mills October 30, 2012, 3:55 pm

As an older reader of this blog, I’m a little late to the early retirement / financial independence party. However, over the last decade we (my wife and I–both teachers) have been able to play catch-up via hardcore savings and consumption moderation. I’m not as Mustaschian as some of you cats, but I feel downright gangsta when I think about how quickly we have acquired a ‘stache. Here is our stat line for the last decade*:

$3,000 – 2002
$30,000 – 2003
$32,000 – 2004
$50,000 – 2005
$53,000 – 2006
$60,000 – 2007
$54,250 – 2008
$62,095 – 2009
$82,473 – 2010
$82,850 – 2011
$88,817 – 2012

I agree with MMM 1 gazillion percent; hardcore saving will almost always trump you investing acumen. Save like there’s no tomorrow…actually check that…save like there are infinite tomorrows and feed you cost-effective investments (index funds, ETFs or target retirement funds–under 20 bips).

* I always feel awkward talking about finances because it feels like I’m bragging. I post these numbers to illustrate the possibilities that result from a serious commitment to saving.

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Amanda April 15, 2013, 2:36 pm

So to be clear, do you advise paying off your mortgage completely before beginning to invest? I’ve worked out that if I throw every extra penny at my mortgage, I can pay it off in just under 8 years… do I have to wait THAT LONG to get me one ‘a them nifty index funds?

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- Agent9 April 15, 2013, 3:50 pm
  
  Why don’t you split it up your savings between the 2? As long as it’s in a tax advantaged retirement account. I think the point of this article is savings momentum trumps investing skills. I would put index funds in a retirement account under the savings umbrella versus trying to market time and individual stock picking.
  
  Even with index fund allocations, experts usually say the importance of stock to bond allocations whether it’s 50/50 70/30 or even 80/20 are miniscule versus just socking away as much as you can in the beginning.
  
  Reply
- Mike S October 10, 2015, 1:25 am
  
  When we lived in Canada (Toronto area) this is what we did:
  1. Contribute to RRSPs (like 401k) to max out employer contribution.
  2. Contribute to RESP (children’s college funds) to get the max government grant (20% contribution)
  3. Max out over-payment of mortgage (was 5.09% at the time and in Canada there is no mortgage deduction, so that’s saving after tax money)
  4. Some combination of additional RRSP contributions and Tax Free Savings Account (like Roth IRA) in a high interest savings account (rates are generally higher in Canada).
  
  We didn’t invest in many mutual funds because the fees in Canada are generally terrible (high front/back end loads, high MER, invisible trailing fees). We didn’t know about Vanguard ETFs being available in Canada until after we moved to the US (in 2013). I think I would have done pretty much the same process even if we knew about the ETFs, but we would have tried to get a Total Market ETF for the RRSP, RESP, and TFSA where possible. In the 6 years we lived in the house, the mortgage went from $200k to $70k and our home value went up at about 7% per year (2007-2013).
  
  Aggressively paying down our mortgage meant that we could buy our house in the US (cash) even though we couldn’t qualify for a Target Card because we didn’t have any US credit history. It also gave us enough FI for my wife to be able to say home with our kids (which works well with our immigration status).
  
  If we had a mortgage in the US at the time I think I would have done the following
  
  1. Contribute 401k / 403b to max out any match provided by my employer. Free money is the best money.
  2. Roth IRA to the Max allowable
  3. Additional 401k / 403b if it would drop a tax bracket
  4. Mortgage as much as I could (do they cap annual payback on mortgages in the US?).
  5. Max 401k/403b
  6. Traditional IRA if I didn’t qualify for Roth.
  7. 529 Plan . It sounds like $14k is the max before gift tax?
  6. Taxable accounts
  
  Currently, I can get, to but not complete step 5.
  
  I’m pretty conservative, so I’d pay the Mortgage off as fast as I could. I’d try to max out my cash flow so that I can help my Kids with college from cash flow (and maybe reduce my savings rate) when they are in School. I will also encourage my kids to seriously consider going to University in Canada where quality of education is the same but the cost is generally dramatically lower (even before factoring in a generally cheaper Canadian dollar).
  
  Reply
Amanda April 15, 2013, 8:05 pm

Thanks for the reply! I know I wasn’t completely on topic – right after I posted my question I found this post: http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/ … But this was the burning question on my mind! I think you’re right, I’ll probably do both, putting more emphasis on the mortgage at least until I get a feel for investing (which I know nothing about and never even considered until I discovered MMM a couple weeks ago!)

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Johnny Shieh May 25, 2013, 6:07 pm

Thanks MMM! I am working towards the MMM way of life as well. I have read many posts over the past few months, but only came across this one today. The comment I have regarding this post is, it is only for the starting process of the MMM way of life. In mid/later years of a person’s a career with accumulated assets of say, 1 million, the difference would be difference. 20% ROI (and what I read, it was 30+% for Warren Buffet) a year would yield 200k, where as 50k saved is still just 50k saved. With reinvesting gains over the next years, the compounded interest difference would be day and night. Of course, I do understand that very few can pick stock winners, but anybody can save if they try.

Again, thanks a lot for this post. It reconfirms what I have been trying to achieve, provided more guidance, and gave me a lot of motivation to see a living example.

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- Lewis November 11, 2013, 3:36 pm
  
  I think what he’s saying is that because the percent difference between the master and the average person is so much larger for savers than it is for investors, then your marginal return on time spent practicing toward mastery is much higher for saving. Therefore, you should become a master saver first. Once you’ve become a master saver, then you can spend the time becoming a master investor, if you wish.
  
  Reply
Kabamba January 4, 2014, 8:51 am

I have come late to this (Savings) party but I am glad i am here. I have made my first 1 year savings commitment for 2014 and I have already kickstarted the party. In the 10 years, I am hoping to do Insane things when it comes to saving and I belive MMM will play a big role.
Thank you for your work.

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David October 26, 2014, 11:15 pm

“Also, by wiping out your debt (including mortgage) early on, you are effectively investing in some guaranteed bonds: paying off a 5% mortgage guarantees you a 5% return forever”

If you are going to compare paying off the home to return on a bond – you buy the bonds with post-tax dollars, so its actually more than a 5% return when paying off the mortgage, because you’re not paying any tax on that fictional 5% return you’re getting. Its 5% * (1 + your marginal tax rate).

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Aaron Frazer October 28, 2014, 1:27 pm

I believe the arithmetic presented here is misleading. If you save a multiple of what others do each year, ne year to the next is additive. IE if I save 10 times as much as you every year for 30 years, I end up with about 10 times as much money.

By contrast, someone who generates a better return than most investors, gets a compounded, multiplicative effect. So getting 4 times the annual return of a typical investor ends up, after say 30 years, with much more than 4 times as much money, the formula is (1.2^30) / (1.05^30) = ~55. He would have 55 times as much money as someone earning 5% annual return.

It is challenging (though admittedly not impossible) to save 55x as much money as other people year after year.

And as you look at longer time frames you will need even more. Your savings are roughly a straight diagonal line, trying to keep up with a curve that bends upward.

I agree that saving habits are very underrated, but I think the mathematical arguments presented here are specious. The bigger reason is that typical investors cannot, over a long period, beat the average returns. They should therefore focus their efforts on savings, where they have far greater capability to influence the outcome.

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- Jonathan June 6, 2017, 1:51 pm
  
  The whole point is that the savings are being invested, so you are getting best of both worlds. You never have to much money liquid, which is the point of prior MMM articles.
  
  Reply
Marsh November 22, 2014, 8:47 pm

Mr. Money: I am curious about 401K and health insurance in terms of early retirement. So from earlier posts I saw that you and your wife still work part-time; how do you guys get health coverage? Also, if one wanted to retire early completely, how would they be covered? As for the 401K, even if you retire early you still have to wait till 65 to take it out right ? So how do you take advantage of that being so young? Finally, do you invest in a 401K on your own, since you’re not working full-time with a company?

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- Mr. Money Mustache February 12, 2015, 5:52 pm
  
  Hey Marsh – if you keep reading through in chronological order, you’ll find all those answers.
  
  Neither of us are employed as of now (2015), although I still have this blog.
  
  We buy health insurance on the private market (currently still $275 or so/month for the family):
  http://www.mrmoneymustache.com/2013/10/28/obamacare-friend-of-the-entrepreneur-and-early-retiree/
  
  Due to non-401(k) investments, I haven’t needed to withdraw from 401(k) yet. But If I did, I would use this method: http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
  
  Reply
ELIZABETH March 9, 2015, 4:18 pm

MMM,
Love the blog, I’ve been reading for more than a year and I appreciate the links and shout outs to other blogs. One of the things I’ve wondered about is what vehicle you use for investing. I notice this is missing from many of the living well sites that are about early retirement and frugal living. Can you discuss? I’m curious if you use a large brokerage to manage your funds or if you use one of the do-it-yourselfers like etrade or tdameritrade. And regarding dividend investing, are you using DRIPs direct or also through your brokerage house or other investment co.? Even if you can’t say which ones you use specifically it would be helpful to know how you manage your funds. Thanks!

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- Mr. Money Mustache March 11, 2015, 7:55 am
  
  Elizabeth – you’ll see in later articles, but there are a few options I like:
  
  1 – Just get a Vanguard account directly and buying their funds directly there. For top efficiency, add the Vanguard Brokerage account and get the Exchange Traded Fund (ETF) version of the funds instead of the standard funds.
  
  2 – If you like CapitalOne360 for your checking account, add a Sharebuilder brokerage option and buy Vanguard ETFs through that.
  
  3 – For all-in-one efficient investing, look into Betterment: http://www.mrmoneymustache.com/2014/11/04/why-i-put-my-last-100000-into-betterment/
  
  Reply
Dom March 17, 2015, 11:33 am

Hey MMM,

Love your blog. My husband and I try to incorporate different ideas slowly but surely. We’re beginner mustachians. :)
I did want to see if you have any advice or maybe a previously written article where you talk about buying vs. renting. I’d also be interested in hearing your opinion on buying a condo. We own a condo, but it’s a free-standing condo, so we own the house but not the land. I hate having HOA fees every month though($120 per month). But homes are really high in our area(Austin, TX), and so there aren’t many cheaper options unless we move out to the suburbs. The other layer to our current situation is a new baby on the way. Trying to figure out what to do with all of that and both of us working full-time.

Thanks for any advice or direction to your articles. Trying to slowly make my way through all of them. :D

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- johnnyfromcanada November 16, 2017, 11:07 pm
  
  Having owned both condos and houses (with land), I would say “don’t fret the strata fees”. They seems really irritating until you sit down to really think through the opportunity costs. Of course, the Strata Board needs to be competent, and budget an appropriate Contingency Fund. Otherwise, you can get stuck with (sometimes-egregious) “special levies” (Vancouver BC had a rash of “leaky condos” back in the day.)
  
  If you own a house you have to build up a contingency fund on your own for any untimely big expenses (say a new roof). How disciplined are you to set aside money for that? On the other hand, one option you do have with a house is to pay for maintenance via “sweat equity” – a point MMM likes to make.
  
  Reply
RobertD November 17, 2015, 4:02 pm

Just stumbled into this blog and can’t stop reading it. Regarding investing versus savings, I agree completely. I have been living in my RV for five years. I moved into it to get my expenses down and get out of debt as fast as possible. I find it perfectly astonishing how far a small income–less than 20k–can go with no debt to suck it all away to make landlords, bankers, and merchants rich. Currently saving to buy a couple acres of land and build a tiny house on it. No debt, ever again, if I can possibly avoid it.

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- Jonathan June 6, 2017, 2:06 pm
  
  Any update here, RobertD?
  
  Reply
Bruce A. III September 22, 2016, 1:05 am

So I invest for free into my IRA and the TSP, a federal government employee retirement account. My wife and I max our IRAs every year and I put 10% of my base pay into my TSP which right now comes out to $7,800 per year. I am paying off some credit card debt and will be out from under that by January 1st of this coming year, which will free up at least $12k per year as I am paying $1k a month to get that debt gone. I could continue to put more into my TSP but that is all money that I can’t take without penalty as it is a Roth account. Should I open an account with an investment firm and begin to pay fees on my twice-a-month investments (invest every payday) or stick with maxing out retirement accounts first? With any luck I will retire from the Army in 12 years making more than enough to live on but if that doesn’t pan out with all the drawbacks going on then I’m stuck with a retirement from the Army reserves instead of active duty and I can’t collect that until the same point at which I can start collecting from my IRA.

Thanks for any feedback!

Reply
MJII August 28, 2017, 12:55 am

Another great article.

Reply
j October 9, 2017, 6:25 pm

Question – if you are actually Warren Buffet and the amount you have to invest is astronomically higher than your expenses, then I would venture that the added income of investing well would be a much larger shift than living more frugally. At what total net worth (..or perhaps ratio of total assets to living expenses..) would one do better to focus on investment outcome rather than frugality? I do realize that optimally one would do both, but there must be a point financially where frugality would become minimally important – where is that tipping point?

– j

Reply
- Mr. Money Mustache October 10, 2017, 9:15 pm
  
  If you are at that point, money no longer matters, so you get to focus purely on living the happiest life you can lead – congratulations!
  
  Reply
Sindhu October 24, 2017, 11:59 pm

“just pay off all your debts, than start throwing it all into the Vanguard index fund”.
I have been following you religiously for the past few weeks and its been life changing in so many ways. I am super excited to live debt free and looking forward to my own early retirement. our only debt right now is around 300k that we owe on our home. Me and my husband are in two minds, we could pay it all off by selling our company stocks but since we are already in a high tax bracket(33%) selling our stocks means it will be reported as additional income which means we will end up paying even more taxes. so do you think selling the stock to pay our home is a better idea vs keeping it till we retire(in which case who knows what the value will be) or sell the stock and use that money to invest in VSTAX which i realized may be a better investment than holding it all in an individual company stock. what would you do in this case

Reply
Vanshaj Bindlish July 19, 2021, 5:39 am

Hey MMM
I’ve started reading your blogs and I they were quite informative. But this one really caught my eye because I’m a big fan of the power of compounding. I really like how you challenged that you can beat compounding by saving more. The 1-10 savings rate to 1-4 compounding rate.

So, I used excel to find the truth. Let’s assume there are 2 person, A who saves $5,000 per month and B who saved $50,000 per month.
A- $60,000 annual savings, earning an interest of 20% p.a.
B- $600,000 annual savings, earning an interest rate of 5% p.a.
This is means the interest rate is in ratio of 4:1 for A:B and savings are in ratio 1:10.

I’ve done a simple calculation to show you the power of compounding. A deposit $5,000 every month and get 20% return annually and B deposits $50,000 every month and gets 5% return annually. I’ll show 3 scenario, for 20 years, 30 years and 40 years.

For 20 years of compounding, wealth of-
A- $15 million
B- $20 million
This clearly shows that B is better off than A by $5 million (33% less than B).

For 30 years of compounding, wealth of-
A- $116 million
B- $41 million
Here the tables get turned. After 10 years A is better off than b by 2.8 times of its entire wealth. Such a huge number. A is earning much more even when he’s saving too little. This is the magic of compounding.

For 40years of compounding, wealth of-
A- $850 million
B- $76 million
If we take 40 years of time frame, you will see that B is out of the league of A. A’ net worth is more than 11 times than that of B, even when he’s saving only one-tenth of B’s amount. So, now you see the real power of compounding.

I’m not saying that you are wrong. But, think of the same magic if we save just like MMM and compound like Warren Buffett. Means saving $50,000 every month ad compounding at 20% per annum. By investing $24 million dollars you will have humongous $8.5 billion dollars in your hands after 40 years of compounding.

Reply
- Mr. Money Mustache July 21, 2021, 8:51 pm
  
  Hi Vanshaj! Thanks for the analysis, and you are RIGHT – but only over the long run.
  
  The key to this article is in the paragraph that says “over the 7-10 period that you will be saving”. Because early retirement is very different from traditional super-ridiculously-late retirement, the math is different too. So, the savings rate really does dominate.
  
  It is true that over a lifetime, a difference in investment return percentage will make a much bigger difference. And if you happen to achieve that, great! But my point with this entire website is that it is not really necessary or even all that useful. Once you get enough money – enough for all your needs and wants and then a bit more so you can feel really safe – there is very little benefit to getting even more.
  
  So, I still stand by the idea of this article: focus on a high savings rate, and you’ll get to Financial Independence as quickly as possible.
  
  Reply
  - Vanshaj Bindlish July 22, 2021, 11:23 pm
    
    Hey, thanks for sharing the great insights and now I’m really understanding what you are trying to say. This is all a full proof plan for early retirement rather than having a huge stack of money over a long period of time and not enjoying life.
    
    Thanks for sharing your views.
    Vanshaj
    
    Reply

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