Mr. Money Mustache has his fans. Also, his detractors.
A recent column profiled the Canadian engineer behind the U.S.-based website (www.mrmoneymustache.com) devoted to early retirement and frugal living. The story attracted a mob of readers and more than a few dissenters who poured scorn on the idea that anyone can (or should) retire at 30.
I suspect their antipathy has much to do with the sense of failure that can come from comparing your own situation to Mr. Mustache's. After all, if you're over 30 and still working, you've fallen short of full Mustachian glory.
But not so fast. Even if you're not prepared to exit the work force at a tender age – or simply don't want to because early retirement would bore you to tears – Mr. Mustache's story still illustrates some principles of personal finance that are often overlooked. Let me draw out three underlying tenets of Mustachianism that anyone can use:
Frugality is good; early frugality is even better
It's easy to spend your full paycheque when you first start working. Who doesn't want to stop living like a student?
But living on the cheap during those crucial early years of your career can have a powerful multiplier effect on your future prosperity.
Everything else being equal, a dollar saved at the age of 25 is far more potent than a dollar saved when you're 45 or 65 because of the way it can compound over time.
To be sure, your savings potential hinges on factors that may be outside your control. Mr. and Mrs. Mustache were in the rare position of being able to graduate immediately into well-paid computer-related jobs. Few twenty-something couples enjoy that level of immediate prosperity – or the same willingness to start saving right away.
But that doesn't mean you can't apply the same principle a few years later in life. A couple who each makes $75,000 a year will have a combined after-tax income of about $110,000 to $118,000 a year depending on their province of residence.
If they live as frugally as Mr. and Mrs. Mustache, they could save $80,000 a year, or $800,000 over the course of a decade.
If they produce a 5-per-cent annual return on those savings, they'll have more than a million dollars in hand to help finance the rest of their lives.
Pedestrians (and cyclists) win
So why don't more middle-class couples shoot from zero to a million bucks? One big reason is the amount we spend on cars and commuting.
Unlike many of us, Mr. Mustache relies on a single small vehicle. He bikes wherever he can to avoid auto-related expenses. By reducing auto usage to a minimum, the Mustaches put themselves thousands of dollars ahead of their peers, year after year.
This is not a small matter. The Canadian Automobile Association estimates that a person driving a mid-sized vehicle 20,000 kilometres a year will have total costs of about $10,700 annually, including gas, insurance, depreciation and maintenance. A two-car couple can easily spend more than $20,000 a year on car-related expenses.
So what happens if that couple cuts back to only one car and invests the savings instead? At a 4-per-cent annual rate of return, they wind up ahead by nearly $1-million over the course of a 40-year working life.
The quarter-million-dollar question
Mr. Mustache's success reflects a fundamental truth about retirement: Every $10,000 you trim from your annual expenses is equivalent to roughly $250,000 you don't have to save.
That's based on the 4-per-cent rule that Mr. Mustache and many others espouse. The rule says you can safely withdraw an inflation-adjusted 4 per cent a year of your initial portfolio. So $250,000 in savings translates into annual, inflation-adjusted income of $10,000 a year. Conversely, cutting your annual expenditures by $10,000 a year means you have to save a quarter-million dollars less.
It's possible to take issue with the Mustachian reliance on the 4-per-cent rule (for one thing, the rule was designed for retirement periods of 30 years, not 60 years), but the broad logic is tough to dispute. Every additional dollar you want to spend in retirement requires about $25 in additional savings to support, more or less.
Even if you don't want to live quite as frugally as the Mustache clan, you should keep that bit of math in mind. Devising ways to trim $10,000 a year from your retirement lifestyle can dramatically reduce your savings goal and move early retirement from dream to reality. Just ask Mr. Mustache.
Ian McGugan