Jul 14, 2011 56 comments

Living better than your neighbors on 75% less

In one of the earliest articles on this blog called “If you Try Sometimes…“, I briefly described my goal of living life at a cost of 75% less than “normal”. Since then I have received many questions:

What is Normal anyway?
Where did I get this 75% number?
Is it ridiculous or is it easy?

First of all, there are three major reasons that I set the target at 75% off:

After measuring my own spending compared to others in the same income/assets group, I found that my own family seems to spend about 75% less overall, and yet we still seem to have a happier and healthier life than average, and plenty of material comforts as well. We have mostly cut out only the Wasteful Bullshit like cable TV and diamond rings and such, while keeping the things like a nice place to live, good food and health, good times with friends, etc.
When reading books about the Earth’s climate and ecosystem, I find the general estimation is that rich-world residents are consuming natural resources at 400-500% the rate that the planet can regenerate them for us. So to be decent citizens of the Earth and use only our fair share, we need to cut our average consumption by at least 75%.
Since the default US household saves juuuust about 0% of its income, you will end up saving about 75% of your income if you can reduce your spending by 75% below these defaulters. For each year you save at this rate, you have bought three years of retirement. With compounding, you will have 25 years of living expenses saved in about 7 years, which will generate enough passive income to pay for your lifestyle forever, even assuming only a 4% annual dividend/withdrawal rate.

Now to get into some interesting specifics. An MMM reader recently sent me a link to an eye-opening spreadsheet at the US Bureau of Labor Statistics. It is called the 2010 Consumer Expenditure Survey. You can check out the whole spreadsheet at this link, and for casual readers we’ll dive into a fun column from it right here.

My favorite column is the “$70,000 and above” one, since it turns out to represent an average household income of $129,528 before taxes. The solid well-to-do middle class two-income working family that Mr. Money Mustache hears from so often. The people that complain that they need two incomes to put food on the table, and that President Obama claims are suffering so dearly due to 8% unemployment and $3.75 gasoline. The same people that could be retired in 5-10 years if they could grow themselves a Money Mustache.

So let’s go through the annual spending of our high-income compadres and see where we can make fun of them:

Income before taxes        $129,528
Income after taxes        $123,705 <-Admittedly an odd number – probably includes clever use of loopholes and excludes state and FICA taxes.
Age of reference person       47.3

Average number in consumer unit:
Persons       3.1
Children under 18       0.8
Persons 65 and over       0.2
Earners       1.9
Vehicles       2.7 <-Wow, an average of almost 3 cars for a 3-person household. Nice!

Housing tenure:
Homeowner       86
With mortgage       68
Without mortgage       18
Renter       14
Average annual expenditures       $82,060

Food       $9,761
Food at home       $5,236
Cereals and bakery products       $701
Cereals and cereal products       $235
Bakery products       $467
Meats, poultry, fish, and eggs       $1,125
Beef       $301
Pork       $204
Other meats       $158
Poultry       $210
Fish and seafood       $199
Eggs       $53

Holy Crap! $1125 of Meat! My pricey cage-free organic eggs do add up to $200 per year, but the rest of the meat and fish is only $250 at most. Our total grocery spending was about $3800.

Dairy products       $577
Fresh milk and cream       $189
Other dairy products       $388
Fruits and vegetables       $928
Fresh fruits       $320
Fresh vegetables       $304
Processed fruits       $162
Processed vegetables       $142
Other food at home       $1,904
Sugar and other sweets       $203
Fats and oils       $138
Miscellaneous foods       $1,014
Nonalcoholic beverages       $455

Food prepared by consumer unit on out-of-town trips       $95
Food away from home       $4,525 <-Whoa – their restaurant budget is more than my whole combined food budget! MMM family restaurant spending was $525 last year.
Alcoholic beverages       $765 <-Surprisingly, this is within the $9/week/person MMM drinking limit :-)

Housing       $26,386
Shelter       $15,916
Owned dwellings       $12,306
Mortgage interest and charges       $7,171
Property taxes       $3,231

Maintenance, repairs, insurance, other expenses           $1,904
Rented dwellings       $2,098
Other lodging       $1,511

Utilities, fuels, and public services       $4,849
Natural gas       $683
Electricity       $1,729
$1729 in Electricity is an interesting number. Even for 100% wind power, I’m still comfortably burning less than $300 per year.

Fuel oil and other fuels       $199
Telephone services       $1,556
Water and other public services       $681
Household operations       $1,873
Personal services       $794
Other household expenses       $1,079
The following section is a good candidate for some serious chopping without compromising quality of life. A thousand dollars of housekeeping supplies? I am more in the zero-to-ten dollar annual range here.
Housekeeping supplies       $1,018
Laundry and cleaning supplies       $214
Other household products       $583
Postage and stationery       $221
Household furnishings and equipment       $2,730
Household textiles       $214
Furniture       $611
Floor coverings       $67
Major appliances       $314
Small appliances, miscellaneous housewares       $153
Miscellaneous household equipment       $1,371

Apparel and services       $2,850
Men and boys       $644
Men, 16 and over       $511
Boys, 2 to 15       $133
Women and girls       $1,156 <-Dang.. lots of independent runway models in the average household I guess.
Women, 16 and over       $966
Girls, 2 to 15       $189
Children under 2       $127
Footwear       $460 <-Six pairs of $75 shoes every year? Wowee. My $75 Timberlands from 2003 are still going strong after over 2500 miles of walking, thanks.
Other apparel products and services       $464

Transportation       $12,603   <-My whole debt-free vehicle fleet, including a year worth of gas and insurance, is worth less than this.. and it will be about ten more years before I need my next car at current driving levels.
Vehicle purchases (net outlay)       $4,775
Cars and trucks, new       $2,712
Cars and trucks, used       $1,953
Other vehicles       $110
Gasoline and motor oil       $2,881 <-MMM family this year: $650 because of major road trips.
Other vehicle expenses       $3,976
Vehicle finance charges       $477 <-You borrowed money for your car even while buying six pairs of shoes?
Maintenance and repairs       $1,162
Vehicle insurance       $1,503

Vehicle rental, leases, licenses, and other charges $833
Public transportation $971 <- This includes plane tickets. Unfortunately we are probably up near the average here.

Healthcare       $4,393
Health insurance       $2,380
Medical services       $1,212
Drugs       $621
Medical supplies       $180

Entertainment       $4,733
Fees and admissions       $1,363 <-Hint: Forests and Mountains are usually free!
Audio and visual equipment and services       $1,416
Pets, toys, hobbies, and playground equipment       $1,146

Other entertainment supplies, equipment, and services $809

Personal care products and services $991

Reading $182

Education $2,257

Tobacco products and smoking supplies $371

Miscellaneous $1,351

Cash contributions $3,176

Personal insurance and pensions       $12,241
Life and other personal insurance       $607
Pensions and Social Security       $11,634

Sources of income and personal taxes:

Money income before taxes       $129,528
Wages and salaries       $111,256
Self-employment income       $7,408

Social Security, private and government retirement $6,155

Interest, dividends, rental income, other property income $3,343

Unemployment and workers’ compensation, veterans’ benefits $400

Public assistance, supplemental security income, food stamps       $123
Regular contributions for support       $489
Other income       $355

Personal taxes       $5,823
Federal income taxes       $4,187
State and local income taxes       $1,317
Other taxes       $321

Income after taxes $123,705

Addenda:
Net change in total assets and liabilities       -$10,318 <-So somehow, this average wealthy family still ended up in the red this year?
Net change in total assets       $15,608
Net change in total liabilities       $25,926

Other financial information:

Other money receipts       $845
Mortgage principal paid on owned property       -$4,552
Estimated market value of owned home       $274,601
Estimated monthly rental value of owned home       $1,413

Gifts of goods and services       $2,119
Food       $189
Alcoholic beverages       $17
Housing       $353
Housekeeping supplies       $50
Household textiles       $17
Appliances and miscellaneous housewares       $29
Major appliances       $8
Small appliances and miscellaneous housewares        $21
Miscellaneous household equipment       $80
Other housing       $178
Apparel and services       $392
Males, 2 and over       $95
Females, 2 and over       $145
Children under 2       $71
Other apparel products and services       $82
Jewelry and watches       $27
All other apparel products and services       $54
Transportation       $177
Health care       $39
Entertainment       $173
Toys, games, arts and crafts, and tricycles       $62
Other entertainment       $111
Personal care products and services       $18
Reading       $1
Education       $626
All other gifts       $134
———————

All silly comments aside, it is a very useful spreadsheet that the BLS has created here. Even the first column in their online version, describing the overall nationwide median which turns out to be roughly a $60,000 family income, contains lots of stuff with room for chopping. Rather than doing an across-the-board chop, I find that my own spending ranges from close to 100% in several areas, all the way down to 0% in a large swath of expenditures. All told, we currently live on $20-25k per year, plus a mortgage-free house, as described in the Exposed! article. We consider this our Luxury Retirement spending level – if we were still saving for retirement the level would be considerably lower, as yours should be on a per-person basis if you are not yet financially independent!

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Alan July 14, 2011, 9:05 am

Fantastic!

The Australian version is here http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6530.02003-04%20(Reissue)?OpenDocument
Alan

Reply
No Debt MBA July 14, 2011, 9:07 am

Spending $1,000+ on meat would be crazy talk around here. But the spreadsheet left me wondering who pays the taxes in this country?!? The rate for “all consumer units” is 3% and the rest range from -3% to 4.5%.

Reply
- Madge July 16, 2011, 12:58 pm
  
  hmm, we probably spend about $1000 a year on meat. i am insulin sensitive and respond really well to a paleo-style diet but don’t do so well on grain/legume-heavy foods.
  
  of course we buy our meat at whole foods and from local farmers which costs a lot more than the $.99/lb stuff at the supermarket. comes out to about 2 lbs each per week, which doesn’t seem too excessive to me.
  
  Reply
- Dave March 17, 2016, 7:03 am
  
  This is why average is an awful metric. It’s a one tailed distribution so if Bill Gates netted 10 billion in capital gains, then claimed charitable deduction on what he gave away (typically more then he earns as he’s committed to reducing his wealth) not only is his tax 0, it reduces the average of a 1,000 $100K 30% taxpayers to 3% for the group. The largest 0.1% is driving all these numbers
  
  Reply
Geek July 14, 2011, 9:55 am

Huzzah, we only spend 20k on housing/year! Better than average!
….Though we rent.

As a renter, I would love to see an article about before your mortgage was paid off. I don’t plan on retiring in Seattle unless we get very rich (houses are more expensive than average here), but 200k+ still represents a large amount of saving time for us.

Reply
- MMM July 14, 2011, 2:24 pm
  
  Hi Geek!
  
  The “exposed” article linked from this one does describe my own family’s spending in 2010, which is before the mortgage was paid off. It was closer to $40k as I recall, although principal payments are really a form of saving rather than spending, so really it wasn’t much different than today.
  
  Retiring elsewhere is a great idea. I am writing an article right now reminding people that moving is actually fun, so people should consider it more often. It is good for you, and can save you millions over a lifetime. Why does everyone live in crowded, expensive, flat, cloudy New York City, for example, when they could live in wide-open, sunny, beautiful, mountainous, warm New Mexico for a tiny fraction of the cost!? Mostly because they have some form of Excusitis regarding making exciting changes in their lives.
  
  Reply
  - Kevin February 27, 2017, 4:21 pm
    
    interesting, even the using the median numbers (~$60K after tax income), and your family’s spending from before the mortgage was paid (actually came out to $30K, probably closer to $35K for those without employer provided health insurance), the median family is still forgoing $15-20K in savings on a yearly basis.
    
    Reply
Ginger July 14, 2011, 10:38 am

Maybe they are including deprecation in the vehicle cost? But still $12000 a year? Ouch, that is nuts. I spend $3300 in car expenses for one car (a Toyota), but that includes saving for my next car.

Reply
- Dave March 17, 2016, 6:59 am
  
  The guy who works with statistics all day would like to remind everyone that an average in a one tailed distribution (that is no negative tail) is heavily outlier driven. You are looking at the depreciation on Lamborghini of the super rich to a large extent not anything related to a normal person. Median would be far more accurate
  
  Reply
Scott July 14, 2011, 12:34 pm

If they are making $123,705 after taxes and spending $82,060, how are they ending up in the hole every year?

Reply
- Steve July 14, 2011, 2:41 pm
  
  The average family earning $123K after taxes is not ending up in the hole every year. The average family at this income is cash positive.
  
  It’s only those under 40K that who on average are cash negative. The problems the average person has is they will not always be in the $123K level. When they are younger, they’ll be going in debt they will have to pay off at the higher income levels. The same as when they grow older and their earning power decreases, dropping them down lower into negative cash flow.
  
  Reply
  - Scott July 14, 2011, 3:32 pm
    
    Well, what you say makes perfect sense but I looked at the linked chart and it says “Net change in total assets and liabilities.” So how do you make $40K more than you spend in a year and still lose $10K in net worth in the same period?
    
    I feel like I am completely missing something.
    
    Reply
    - Steve July 15, 2011, 1:15 pm
      
      I assumed they lost money on their investments while consumer debt increased. I could be wrong though. That part seems confusing to me since they account for expenses and taxes that only add up to 80+K
      
      Reply
Heidi July 14, 2011, 1:17 pm

Thanks for mentioning diamond rings. My heart is warmed.

Reply
mark gregory July 14, 2011, 1:44 pm

Wow,great post,

I think in the U.S. you must have a great standard of living…. if this is atypical of an average American family.

I see many, many areas that ‘mr. average’ could reduce costs, but maybe that would hurt the wider consumerist economy?

That aside, to spend this much money means to consume/use/utilise… MMM comments re: natural resources depletion are hitting the spot.

Reply
- MMM July 14, 2011, 2:38 pm
  
  Yeah, I try not to use the term “standard of living” because it implies that spending more money makes your life better. Instead, we could say “level of spending”, because that is the voluntary spraying of money all over the place we do in rich countries, and the mostly unrelated “quality of life” which measures happiness, ecological health, and things like that.
  
  Reply
  - rosarugosa July 16, 2011, 3:08 pm
    
    “spraying of money all over the place.”
    Love it – well put!
    
    Reply
Rainbow Rivers July 14, 2011, 5:13 pm

Another great article from you , I always find it fasinating reading the numbers how average households spend money, some of it I must admit, I find insane the amounts folks spend on certain items. Well I suppose A LOT of the catagories I find to be insane amounts. It is useful and wonderful to see all the facts and figures though as a great way to measure how we are doing and what areas we ourselves can work on!

Reply
Bakari July 14, 2011, 5:47 pm

The most interesting and unexpected thing I noticed on the chart is that, among home owners, the more money you have, the more likely you are to be paying a mortgage, while the less your income, the more likely your home is paid in full.

Reply
Marcia @Frugal Healthy Simple July 14, 2011, 6:05 pm

Wow that was pretty eye-opening. I hope to peruse it more later when I have time and am not exhausted. I am impressed with the tax value. We are in that bracket and easily spend 25% of our income. Also, our housing is over $50,000/yr, but that’s the joy of buying at the wrong time and wrong place (2004, So Cal).

On one hand, I am amazed at the food expenditures (esp. out of the house). On the other hand, with 2 FT jobs, I can see the appeal. I try hard to avoid it, but am not always successful. I prefer to work vs. stay at home though, so there’s not a huge tradeoff for me.

I can see the shoe budget though! When I was running half marathons, I easily went through 2-3 $100 pairs of shoes a year (I am hard on shoes!) Now that I’m walking or running shorter distances, my shoes are lasting longer – and I’m trying “barefoot” running too which should extend it even further!

Reply
- Steve July 15, 2011, 1:16 pm
  
  Yes, but it’s going to be hard on you when you have to change out your feet..
  
  Reply
  - Marcia @Frugal Healthy Simple July 15, 2011, 9:41 pm
    
    I’m more worried about the knees and hips than the feet! That’s why I switched to barefoot…much “lighter” running style and easier on those two sets of 41-year old joints.
    
    Reply
Chris O July 14, 2011, 9:10 pm

Mr. Money Mustache isn’t a Tea Partier? Actually, I don’t care if he is or isn’t. I don’t want to start a political debate (mostly just because I’m tired of hearing them). I would like to know, however, just how that quoted tax amount is possible? I make around and 104k a year currently and pretty much around 30% of that is taken out in taxes. Do you know how this data was collected or how valid it is? I know it’s an official report from some government bureau, but I’d still like to know how they found these averages? I feel like this data would be hard to come across. If people were organized enough to report their spending in this much detail, they should definitely be smart enough to figure out they’re spending too much. I can’t really see them paying someone to audit a random sampling of people either. Just curious…

Reply
- Bakari July 14, 2011, 10:34 pm
  
  30% out of each check, or 30% at the end of the year, after deductions and exemptions, credits, and deferments, and considering both refunds and rebate checks?
  
  Also, are you counting social security, medicare, and unemployment as “taxes”? Those (assuming you live long enough) you get back.
  
  How much is “taken out” isn’t what most people are actually paying.
  
  Reply
  - Chris O July 15, 2011, 7:48 am
    
    I just reviewed all of my paychecks and taxes for the past year. They took out a total of 27.6% out. This includes, federal, state, and social security. I am single, have no children, and really have no other deductions I can take out so that probably doesn’t help. I also live in DC with an 8.5% tax rate. Guess I need to move, get married, pop out some kids and put the rest of my money into offshore accounts to get down to this average haha. (Side note: I’m 24 so I see the SS tax more as a donation, because I really don’t plan on getting it back)
    
    Reply
    - Tim July 15, 2011, 8:58 am
      
      There is a site:
      
      http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456
      
      that shows very different conclusions than this Consumer Expenditure Survey. The 4.5% tax rate for someone making $129,000 was really bothering me. I know that it shows how the calculations were made, but I do not understand how their numbers could be accurate.
      
      Reply
      - Bakari July 15, 2011, 4:51 pm
        
        The link you provided not only counts social security as a tax (when its really more of an involuntary retirement plan), but it also actually counts the amount your employer pays the government as part of your own personal taxes.
        
        The rational for that may be understandable (presumably employer paid payroll taxes suppresses wages) but it is very misleading to include employer paid tax and only mention it in the fine print at the bottom.
        
        Most likely if your source removed SSI and employer paid payroll taxes, they would end up with a number much closer to MMMs source.
        
        Reply
        
        Aleks December 1, 2012, 2:29 am
        
        I’m bewildered. Looking at my 2011 return, I paid about 20% tax on a similar amount of income. That’s not including any payroll taxes. I can’t even begin to fathom how I could have gotten $20k more in deductions.
    - MMM July 15, 2011, 9:43 am
      
      Interesting data, Chris!
      
      You guessed it right in your earlier post – I am not a tea partier. Although I love capitalism and riches, and I think entrepreneurs should be allowed to run without red tape as long as they are not hurting anyone, I also believe that paying taxes and being as honest and generous as possible in all areas of life and business is truly patriotic. So I view my taxes just as I view any other investment, but with the broad society as the primary beneficiary, and me as a bigger secondary one because I benefit hugely from a peaceful society with as little fear as possible, and as strict controls as possible on wrecking the Earth.
      
      Also, you should read up more on social security. It is not going away, it is just going to have to make small percentage changes in future payouts to remain solvent. Pessimism on the matter is widespread due to wild-eyed fox news commentators, but if you read analysis on social security by any real economists, they will give you a more rational outlook. Don’t get your economic knowledge from campaigning politicians, especially those in the party currently in opposition!
      
      Reply
      - Chris O July 15, 2011, 7:16 pm
        
        … good call. This response is exactly why I love your blog.
        
        Reply
    - Bakari July 15, 2011, 4:37 pm
      
      On this spreadsheet state taxes and SS are both separate columns from “personal taxes” which only counts federal taxes.
      
      The “income after taxes” considers federal taxes only, not state, property, or sales tax. All of those things are listed under their own columns.
      
      MMM’s comment is relevant because it is federal taxes specifically that everyone is always complaining about.
      
      If you add in all the other taxes, it comes to $10,692, or 8.25% average.
      So still, (assuming you aren’t getting refund checks at the end of the year), yeah, you really should be looking for a way to get a few exemptions and deductions and credits.
      
      Reply
    - Katie August 6, 2011, 3:50 pm
      
      We make less than half that income and we paid 9.5% in federal taxes last year (this according to our 1040). That 4.5% is waaaaay off.
      
      Reply
    - Robert July 9, 2015, 1:56 pm
      
      You will get some of your Social Security back. Social Security includes Disability Insurance. If you have a catastrophic accident you may benefit from the disability. I do not wish it upon you. If you have children and die before they are adults they will benefit until they are adults.
      
      Social Security benefits have to be reduced one way or another. But you will get some return for your contribution
      
      Reply
- Scott July 15, 2011, 7:37 am
  
  Agreed. The taxes aren’t even enough to cover payroll taxes on the average wage amount.
  
  Reply
- Marie September 12, 2015, 7:20 pm
  
  My husband and I make less than that, but our “effective tax rate” for federal income is about 12%, plus I think about 3% state income, and we have a fair amount of deductions. That 4.5% number really sounds off to me…
  
  Reply
BC February 15, 2012, 5:00 pm

I own a small business and oversee payroll. We have a few employees making just over 100K, and their taxes are usually in the 27-35% range. Also, in California we have fairly high state income taxes, so obviously that adds to it.

Reply
Peter Lyons April 29, 2012, 12:07 pm

Great numbers in here, but like many readers the tax numbers don’t make sense to me, which makes me question the rest of the numbers. I would LOVE to see more raw data like this and more MMM analysis, but with better data more clearly explained.

Reply
Brett May 23, 2012, 3:10 pm

I am also calling BS on the tax rate. Earning under 60k I paid 14.35% federal tax (on tax return, not estimated withholding and not including my employer contributions or SSI etc.) last year.

I do sympathize with the tea party somewhat, government spending is almost 50% of our entire national output today, I’m confident we could defend ourselves, maintain law and order, prevent plundering of the environment, and provide a safety net all for less than 30% of our entire countries output if the government wasn’t so wasteful! And for people that want to put more of their money towards a cause, donate to a nonprofit that is working towards the same goals you have. That’s voluntarily given up by you instead of taken under threat of imprisonment. It will also reduce your tax bill :)

Reply
- Mr. Money Mustache May 23, 2012, 3:19 pm
  
  Are you sure about that 50% figure? I thought that US gov’t revenue (all levels combined) was about 26% of GDP. By comparison, Canada, which has a booming economy and very low deficit and debt ratio compared to the US, taxes its citizens at 32%:
  
  http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP
  
  I’m not a tax lover by any means, but lower is not always better: note the countries that have the highest and lowest tax ratios in that table, and then cross reference that to the UN’s human development index for countries as well as happiness surveys.
  
  Hmm.. Costa Rica looks like a nice compromise at 14% of GDP and yet with relatively happy and nice people :-)
  
  Reply
  - Brett May 24, 2012, 1:26 pm
    
    It’s an honor to get a reply from MMM himself! I’m working my way through your blog from the beginning.
    
    Upon closer inspection, it appears US Spending is somewhere in between our figures. Fed + state + local = 41% of GDP . It’s increased steadily throughout history, except for a jump during WWII and the Congressional Budget Office has the steady increase continuing as far ahead as they project. (http://www.usgovernmentspending.com)
    
    Fed spending alone is 24.1% according to whitehouse.gov which agrees with the above websites “federal” figure.
    
    I agree with you on Costa Rica being a desirable place to live – that’s definitely a long term retirement destination idea for me as I understand it is a great place for that, including for the reasons you mentioned.
    
    I don’t agree that you can conclude differences in Human Development or happiness were likely caused by differing levels of government spending based on correlation.
    (http://en.wikipedia.org/wiki/Correlation_does_not_imply_causation).
    
    My academic studies of Applied Economics, following of current events, conversations with government employees and union leadership, and work with nonprofits and healthcare finance industry have all given me the impression that the government is pretty inefficient and should ideally be moderately smaller than it is. I do agree that many government programs full crucial roles, I just strongly feel there is a lot of waste and inefficiency, and little justification for the trend towards government spending approaching the level of all other spending. I guess it comes down to opinion in the end though.
    
    Reply
LT September 20, 2012, 11:22 am

How can anyone making that much money be receiving public assistance?! Even if it is only $123.

Reply
- Elizabeth March 6, 2013, 10:14 am
  
  No one making that much had to be. It is averages. There may be enough people getting aid to slew the average up. I think.
  
  Example 20 k 60 k 220k average is 100k. If the 20 k household gets 400 in food stamps per month that’s an average of 133 per month to go with the 100 k average income.
  
  Reply
- Eric June 6, 2014, 2:27 pm
  
  I imagine it is from people who have a high paying job for a portion of the year and then lose the job. Even though they did have a 6 figure income, they would still be elgible for food stamps and such now that they are unemployed.
  
  Reply
vr September 3, 2014, 1:24 am

I always knew US has quite low tax rates on income but wtf, income tax 4.5% on over 120k numbers??? My income is about 40k per year and I pay 25% taxes off that income, plus 24% value added tax on EVERYTHING I buy from the store/services I order (gym, electricity, massage, car, etc), gasolines price includes over 56% tax atm and they intend to rise it next year (yesterday the price of 98oct was 1.65€/l = about 2.17 US dollars/l?), 95oct was about 10 cents lower and diesel about 15cents lower than 98oct.

That income tax includes government guaranteed pension (after I turn 65 AND retire) which is about 60% of my salary right before retiring (percentage will drop for sure if the economy stays as low as it is now) and covers much of the cost of public healthcare, but still that 4.5% you guys have is insanely low!

Reply
- mike August 22, 2016, 12:45 pm
  
  Averages can be misleading. The median household income is considerably lower- around 50k. At that point, a couple kids and a mortgage, maybe some credits and poof, very little tax. Which will then skew the “average” federal rate to the low side. Mittens Romney is a total d-bag, but there was some validity to his 47% comment…
  
  Then consider what drives the mean income to be so much higher than the median; high earnings people, who often benefit from the capital gains rates.
  
  Also, it looks like the chart dumps SS tax into a different bucket – “Pensions and SS”
  
  Reply
bahri October 14, 2014, 8:29 pm

I read all the comments but nobody really explained how can the tax be 4-5%.
I am paying about 14% of my every pay check to federal tax and based on my calculations i will still owe another 5-6% of my income in federal tax after deductions (which is mostly mortgage interest).

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OldHippie January 8, 2015, 1:35 pm

Hi MMM–

First, thanks for the blog. I’ve been following it for less than a year, and see that I’m about three years late for the comments on this article. It’s another good one.

My family came to fit this meme over a long period starting with a back to the land movement in the seventies. Our big leap forward was when we (Mrs. OH and I) moved to rural Alaska about 15 years ago. Since then our two adult children and grandkids have followed, and we have gradually developed an extended family mutual support thing that looks to be permanent. Living in the bush (in Alaska, “the bush” means that there aren’t any connected roads–our nearest road is about 300 miles away) has a lot of benefits, and I we are all grateful to have found such a good niche. Some of the things that are different here–

1. Salaries are fairly high. Everything is expensive, compared to, but that’s not all bad. My job is a hobby-retirement thing that I do mostly because it’s what I want to do. My wife is a teacher, and her income went up radically since our move. Taxes are low, mostly non-existent. I consider it a minor matter that Alaska gives away money to residents every year, but it’s a nice gesture.
2. Housing can cost a lot, particularly if you buy a modern, custom made house. My son and I each built our own houses, using logs we cut and milled ourselves, and that’s quite the opposite. Our (fairly small but efficient) houses were each built with less than $20k of actual money. No debt, no insurance, no taxes, cheap land, great environment. We have mountains in sight all around, and the Yukon River is right over that-a-way. The logs for the houses were harvested on federal land that issues permits for subsistence use–as long as you don’t sell the stuff, it’s there for public use. That includes not just house logs and firewood, but food harvesting (moose and salmon mostly), trapping, gathering, and recreational use. We have a recreational cabin a few miles up river–the land was purchased, but the cabin is made with logs, and cost less than $3,000.
3. Vehicles– This is a bit of a downside. Gasoline is about $8 per gallon, even as the national prices have gone below $3. Heating fuel is about $6/gallon. Maintenance parts and supplies have to be purchased by mail, and there’s no car repair shop or tire store. Seasonal vehicles include a boat, at least one or two snowmobiles (they are so unreliable that I almost travel with at least two machines if the trip is farther than I’m willing to walk home), a bike, a car of some sort, and several sets of good boots. The cars (one per family, plus a pickup, plus incidental hobby vehicles) are selected for easy maintenance, durability, and long term parts availability. One car is big enough to launch the boats, one pickup for hauling firewood, one or sometimes two cold-weather capable commuter vehicles to get the kids to school in the winter. Our driving is pretty minimal, so the fuel cost is in the range of a tank of gas a week, but that tank costs about $125, and pretty much serves all three families. Maintenance is a big issue, but the cost is just for the actual parts and supplies. We occasionally buy a vehicle, but we also build our own from found junk. Most of the vehicles are basically salvaged.
4. Heat and utilities–Utilities are relatively expensive. Sewer and water charges come to about 13 cents for every gallon of water we use. The water is delivered by truck, and the sewage is pumped and hauled to a central treatment facility by, yes, truck. Electricity is from a diesel power plant, and costs about $0.67 per kWh. So, we have good reason to economize on the utilities. We reuse gray water for flushing the toilet, have modern efficient appliances, and LED lights, and don’t waste water. The utilities average about $250/month including sewer, water, trash, and electricity. Our principal home heat is wood, with fuel oil as a backup. The wood stove and the oil heater are both the best we can find, and even in this climate, with about 15,000 heating degree days a year, we can heat the house for about $1000 a year–much less than that if you don’t count the value of the wood that I cut and haul myself. We use about 30 gallons of heating oil a year, plus three cords of wood. Handling firewood has some costs of its own, of course. The chainsaws, pickup, and snowmobiles all contribute to the firewood supply, and cost money to maintain, so hence the cost for wood.
5. Food. Everything has to be delivered by barge in the summer or by air freight for most of the year. Store prices are pretty much double the cost of anything in metro areas. Milk is $9 per gallon or more, depending on where you buy it and what’s available. On the other hand, the wild food is readily available and cheap. I haven’t hunted for years, but every year we are given all the moose and fish (wild salmon!) we can use. Gardens are prolific because we get 20 hours of daylight all summer long.
6. Quality of life. It’s impossible to adequately describe living in the bush, but briefly, it’s good. We can walk or bike anywhere in town. There’s a lot of satisfaction to subsistence activities, which include things like building and maintaining almost everything we use. I can see the northern lights and faint stars at night because it actually gets dark here. I really missed that back in the states. It’s quiet too. Really quiet most of the time. There’s a dog team next door, and they sing for us every night. That’s actually a lot nicer than it sounds, like having an exceptionally innovative jazz ensemble jamming away.
7. Travel. We all travel by air several times a year. A flight to the nearest city with a blacktop road costs about $500. Some of the travel is for work–I do about two trips a year associated with my job, and the other adults probably average the same or even more. Boats and snowmobiles are OK for local trips (it’s about two hours/50 miles to the nearest villages), but they are horrifically expensive to operate–about $1 per mile per vehicle.
8. Money. Since that’s what this blog is about. We blew all of our savings to move here, but they all came back, and they have friends now. The house (actually all of the houses in our extended family) and all of the vehicles are paid for. We have a pretty decent balance in the 401k account and a scattering of pensions from years past. We have some consumer debt, but it will be gone in about a year–your blog is a good motivator for stomping that last middle class artifact to death.

So finally, thanks for the sentiments and advice. It makes me want to do better with money, although I have a feeling that money is a very bad way to measure value.

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Geraldine March 10, 2015, 11:01 pm

Holy moly, such low tax levels, who’s paying the taxes in the US? I live in Denmark and 53% of my middle income paycheck-every month- goes right back to the tax office, that doesn’t include the 25% VAT and the 17% property tax, the 180-230 % car sales tax, the around 75% tax on gasonline, the extra taxes on alcohol, sodas, sweets, light bulbs, fuses, etc.. This country is crazy, no wonder we have the most indebted households in the world (the average Danish household is far more in debt that the average US household). If you want a cheap car in Denmark, you have no car, because there is no such thing as a cheap car here. People take extra morgages on their house in order to get a car loan at a reasonable interest rate. Despite all these taxes on cars and gas, mileage in public transport is now higher than mileage in a car, so that explains why most of us bike in every freaking weather. In Denmark the state and price levels force you to be frugal. Eating out is a luxury, that can easily cost your entire week’s food budget. Going to the pub is unaffordable, so people get drunk at home first before they go out. We have the highest grocery prices in the EU, so that makes you think twice before you put anything in your basket. Books and electronic appliances cost more here than f.ex. in the UK even without VAT, so Amazon.co.uk/de is a saint in this country. Sounds like we could live pretty easily in the US given our habits from home ;).

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- Mr. Money Mustache March 11, 2015, 7:52 am
  
  You definitely could live well here – Denmark’s residents are known to be extremely Mustachian (even though I would not be happy about those tax rates).
  
  Comparing costs between the countries, it looks like they aren’t all that different on the things that count (i.e. excluding cars and gas). Would you say these prices look accurate to you?
  
  http://www.numbeo.com/cost-of-living/compare_countries_result.jsp?country1=United+States&country2=Denmark
  
  Reply
  - AuthenticExplorer November 27, 2015, 4:06 pm
    
    I’ve been slowly reading from the start (and still a long way to go to the present!) and I keep wondering how well all this advice is applicable to people from for example european countries.
    
    More specifically, The Netherlands, which I come from and live. I estimate that with current income and expenses, I’m saving about 59% of my take home pay. 15,6% of my take home pay goes to my share of paying off the mortgage and its interest, 13,84% goes to my share of the ‘household’ costs and 12% goes to my part of the holidays and dinners out, so the latter two can still be optimised, which I fully intend to do.
    My girlfriend however is at 23%, (there are a lot of mindset changes to be made), with our income near equal, we’re at about 42% of ‘staching together.
    
    The problem seems to be the relative salary and taxes, compared to the nest egg , which is quite a stretch away from the 80k take home pay that I think is being suggested, and 123k being discussed.
    
    I’m not saying there is no room for improvement in my case, but there seems to be a -lot- of room for improvement in the fictional case being presented, perhaps making me wonder if the entire US economy is currently set up for excessive spending allowing for early retirement to be possible in a short period of working career (until something causes the system to course correct by decreasing the gap.)
    
    Maybe people in the netherlands are already pretty frugal and the dutch economy game has adapted to that to keep the status quo, allowing for less room for ‘staching.
    
    Not that all this is deterring me, but I do want to know what I’m up against and how to correctly translate to my situation.
    
    Reply
Lady Locust August 8, 2016, 2:09 pm

We purchase a whole, organic, grass-fed beef each year (roughly $2K) and hover around $5000 on groceries per year (could be lower if I really tried.) Meat is not what breaks the food budget. Over $1400 on cereals (sugars) and over $2900 on misc. food and other food at home – what is that? That’s a lot of money. We eat closer to an organic, non-processed, diabetic diet. We are not diabetics and do eat some carbs, but find this to be the healthiest for us. We are not over-weight and have no health issues. I know others might have different food beliefs, but the cost of meat (naturally raised at that!) is not the budget breaker it is made out to be. I just wanted to share a little different perspective – hope that’s okay.

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MKE January 14, 2017, 8:10 am

As others have pointed out, it is mathematically unacceptable to use “average” in income statistics. The “mean” is what should be used, and then for conversational purposes, once can think of it as “average.”

The mean income in the US is $57,000. It has remained in this ballpark for an unfortunately long time. “Middle class” is generally defined as making between 2/3 and double the median. It is a wide range that defines the American middle class as having household income somewhere between $40,000 per year and $120,000 per year, in simplified numbers.

The “middle class” example that MMM cites is actually upper class! Even after taxes, it is an example of an upper class household.

It is indeed good advice, if you are making upper-class money, to live as though you are at the bottom of the middle class. But let’s be honest about it. Every increase in income makes it incrementally easier to save. At some point, each extra dollar is unnecessary. Yes, the royalty spends foolishly, but they are, after all, the royalty.

Without silly quibbles about FICA not being a tax, people making 120K are likely to pay about 36K to the IRS (I do!). That drops the take-home pay to about $84,000, and this is even ignoring the roughly $1,000 per month for health insurance, state taxes, and property taxes. (Those have already been accounted for in the taxable income, so deductions are over and done with). The end result is going to be around $75,000 entering such a household, and it’s not going to be easy to save $90,000 (.75X120,000) if you only bring home $75,000.

Many people have pointed out the bad math in this example, and many others have understandably questioned the unrealistic tax assumptions. You put the two together, mathematically, and it becomes literally impossible to do the math MMM does, wherein you are saving more than you are making!

I agree, spend less than you earn, by as wide of a margin as possible. But you can’t save more than you earn, either. Base your life on mathematical reality. You are unlikely to make an upper-class income straight out of the chute, and by statistical definition you are unlikely to ever make an upper-class income ($120,000+ pre-tax). Thank your lucky stars if you are high-income! You can always, though, spend like you are in the bottom of the middle class if you make more than the bottom of the middle class.

Take heart, the “average” is not so average after all.

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- Mr. Money Mustache January 17, 2017, 10:01 am
  
  Thanks MKE, I corrected some of the assumptions/numbers in this article, but it is still sloppy. I was ranting about the general numbers in the BLS spending tables, so if you focus on that rather than after-tax income you will have fewer problems.
  
  After all, tax is a flexible thing (401k/IRA contributions, structuring your income as a business, etc.), and even more importantly, spending is even more under your control – in theory it can go to zero if you are skilled enough at making deals. In practice, this would be very difficult of course, but it’s good to keep the core idea in mind, rather than assuming certain costs are fixed and unavoidable.
  
  Reply
  - MKE January 23, 2017, 1:29 pm
    
    Thank you for your blog. This may not be the correct place for this response. so delete if necessary. The best part of your view on savings is the fact you don’t have to save from a viewpoint of scarcity. I can save because there is so damn much available! That change in viewpoint is so important. Saving based on limitations is a drudge. Savings as a lifestyle choice is enjoyable.
    I started reading a few weeks ago, and it has helped me get inspired about saving again and to be happy about it. Sure, there might be a few “sloppy” points in this article, but much worse, I had become sloppy about my spending and thinking, which is a much greater problem.
    Not changing a whole lot. Still riding my bike all over, but I am watching and enjoying my dollars – my only employees- a lot more. And I don’t feel so damn alone doing it. You have put a little more spring in my step, something you can be proud of even if I am some screen-named stranger. Thanks!
    
    Reply
    - EarningAndLearning April 11, 2017, 5:43 pm
      
      Hey Mike, fellow late-to-the-blog-reading-from-beginning person! :) I loved what you said, about the new MMM perspective of saving from abundance, versus scarcity! That is so true! When I was hearing from other financial bloggers and writers to aim to save 10% it seemed so tough, and a bit defeating cause it hardly made a difference, but all this MMM reading about saving at least HALF of my earnings does make me feel richer! And more appreciative of the luxury around me here in North America.
      
      Happy continued reading! :)
      
      Reply
Flow Focused October 6, 2017, 7:11 pm

How can I get food down to 3800 a year!? My family size is 2 adults and 3 yr old and an infant. We are at about 740 a month on food. If we ate out zero, our actual groceries which does include soaps, toilet paper, and food would be about 615 a month.

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