Mr. Money Mustache is the Babe Ruth of the early retirement zealots on the blogosphere. His fiery style with a touch of badassity has inspired thousands around the world to get off of the financial treadmill and to achieve financial freedom at an early age. And if you are looking for someone as financially savvy as Mr. Boggle, start reading the blog of one of my favorite bloggers and a pal jlcollinsnh.
Together, Mr. Money Mustache and jlcollinsnh. are two great minds to seek financial wisdom from. As Father’s day is approaching fast, I asked this duo to provide their financial advice for young adults, including my daughters, who will soon have to start making financial choices in their lives. And they did not let me down.
Jim Collins even engaged his daughter in this conversation to make it bit interesting.
Me: You both have achieved financial independence at a relatively young age. If you have to advice young people who are about to begin working, what are three important financial habits that have had most impact on your financial well-being?
Jim: I actually have a post in the works on this very subject tentatively titled: “My plan for my daughter.” It will be in list form. But the three key elements are:
1. You are young and tough and know how to live like a student and with roommates. Keep doing it.2. Spend the next ten years or so working your tail off. You are young and tough and this is the time to establish yourself in your field.3. Save 50%+ of your income and pour this into VTSAX. Pay absolutely no attention to the market ups and downs, unless you want to celebrate the downs as the buying opportunities they are.4. Do this and 10-15 years out you’ll look at your VTSAX stash and realize you’re Financial Independence. At that point sit back, sip a glass of fine wine and savor the delicious dilemma of deciding what to do next.
MMM: The same rules apply to everyone hoping to build some wealth: You need to spend less money than you bring in. For me, that meant working the equation on both sides – I deliberately sought out jobs that paid well, and always kept an eye on expenses.
To be successful at this, you can’t give up too easily at the first sign trouble. Many people say things like “I can’t ride a bike to work, because I live too far away”. And thus, they doom themselves to spending $100,000 every 10 years in commuting costs. When really, you are always free to optimize every bit of the equation. You can move to a new house, or a new job, city, state, province, or even country. The same trick applies with every area of expenditure, and even your earning potential. Everything can be optimized, and there is ALWAYS another, better way, as long as you don’t put up mental roadblocks for yourself.
For a young person, I would advise: find a way to save at least 50% of what you earn, and eventually 75%. Do as much optimization as it takes to get there. At that point, you can relax a bit, because you’re less than 10 years away from financial independence, when money will soon stop mattering. It will be much easier and less radical than it sounds, and the results in your later life will be spectacular.
1) always invest at least 50% of your income,2) learn to live on minimal needs,3) avoid all debt
Me: I grew up in India when there was no credit card. One lesson I learned from my father early on was to delay gratification till I can earn money to pay for. Fast forward now — with easy credit and rapidly growing consumerism — what parents can do to teach their kids value of money?
Jim: Nothing teaches the value of money quite like work. My daughter is a waitress and she knows just how much effort it takes to earn those tips. Next she’ll be on her own and learn all about paying the rent out of her earnings.
If you have to borrow money for it, you can’t afford it.
Never borrow money; and carrying a credit card balance is just about the worst/most expensive form of borrowing there is.
MMM: My own son is 7 years old. We’ve always set an example about not buying disposable things, the concept of a finite environment, and riding bikes instead of driving cars. But recently, I had a neat conversation with him where he started to appreciate the concept of investing.
He has amassed $32 in his little wallet at this point, and he is hesitant to blow it on new toys, because it took him a year to accumulate it. But I explained that if he invests that money at a 10% return, he’ll get $3.20 every year just for letting someone else borrow it. Plus, he’ll still have any additional money available that he earns.
He’s excited by this idea, so he is going to invest all $32 with “The bank of Mr. Money Mustache”. I will pay him 10% interest and give him an auto-updating spreadsheet to track his increasing wealth. To make it more realistic for him, I’ll pretend the money it is in Lending Club or the stock market. We’ll get to the concept of “risk” later.
Jim: Lifestyle inflation has never been much of a concern to me. Rather the purchase of anything is a simple matter of priorities. Would I rather buy a Mercedes or financial freedom?
MMM: For this, I think you need to hail back to the old masters who figured this stuff out long before we were all born. Thoreau, Benjamin Franklin, even the Greek philosophers. It is a natural human weakness to think that buying stuff equals happiness. The illusion is widespread, because it is reinforced by the rest of society and by constant marketing.
But it is possible for a rational person to beat the system. First of all, people are excited to hear the news that they can spend less and still be happier. This frees them from the trap of spending a lifetime always feeling poorer than the next guy up the ladder. It’s the shortcut to getting rich, and everyone can do it. So people tend to listen.
So once you have planted the seed, you just need to lay out the case with enough logic and emotion to get people to see past the false curtain of consumerism. It’s not difficult, because you have the truth on your side. But it takes at least a few blog posts to accomplish this.
I can’t just ride up to a crowd of girls coming out of a boutique store with $2000 Gucci purses on my old mountain bike and say, “Hey Girls! Look at me! THIS is the way to live! Why don’t you return those purses, get yourself some bikes and let’s go hit the foothills!”. It’s a gradual process.
Jessica: I think this will come as the kid becomes more responsible with money. I also don’t think you can generalize a generation when it comes to happiness. Individual people find happiness different ways and I think that stems from their environment, not which generation they grew up in.
Jim:This is a tough one for me. I never thought of what I was doing as stoic or deprivation. It was always simply a matter of the way I chose to spend my money: On building the financial freedom that was most important to me. It is all “spending”, the only difference being what is important to you.I never had much interest in stuff. My main desire has been investments and my indulgence has always been travel. When young that is actually more fun on the cheap. After our luxury week in the fancy Prague hotel, my daughter and I had this very conversation. She greatly enjoyed it, as did we, for its novelty.But she left us to continue her travels in Portugal and Ireland. She was very much looking forward to the hostels and the vibe they provide. I did too at her age, and still do to some extent. But I confess as I’ve gotten older the little luxuries my FI can provide are most welcome.
MMM:As a society, we’re already doing what is necessary – we’ve invented the Internet, which is the first way we’ve ever had for ideas to circulate freely without regard for the power or money behind them. Over time, I believe this will allow the most valid ideas to float to the top, as they stick in the minds of more and more people, and are reinforced and spread through society.
Living life to its fullest is a concept that can exist almost independently of how much money you spend – and when money is involved, there is great flexibility on how you do it. For example, a young person wants to create lifetime memories by taking a long road trip with three friends. Can the memories only be created by making this trip in a financed 2013 Cadillac Escalade? Or could equally good memories also be made in a 2004 Honda Accord? Easy decisions like this are often all it takes to make the difference between a 0% savings rate, and a 75% one.
If the idea of more thoughtful consumption is sound, which I believe it is, it will find its own audience. Eventually, this will change the way people raise their own children, the way they run their governments, and even the nature of business and the products that are offered and promoted. In the future, I fully expect wasteful over-consumption to be something that only social outcasts engage in, rather than the majority of people doing it while feeling it’s a normal way to live.
A book worth reading after reading this interview…