Relative Costs

Hi, Done by Forty readers. Work has picked up lately, so I am recycling a post from back in February 2013. The blog got about one reader a day back then, and I am pretty sure that reader was my wife, most days. Sweet as she is, she wouldn't admit it, letting me think at least someone outside the walls of our home was reading my words. But the bottom line is that, hopefully, the post will be new to you. I'll be back with original articles soon.

From madmarv00 at Flickr Creative Commons

I'm writing to you from the island of Oahu, as my wife is attending a conference here and we decided to make a vacation of it. We've hiked a lot, up to Manoa Falls and Diamondhead and along the North Shore, watched the surfers take on ridiculous waves at the Pipeline, rode "Da Bus" everywhere for a surprisingly affordable $2.50 (which apparently includes unlimited transfers), and are trying to get our money's worth out of the snorkels we bought at Target back home. It's been a great time and we still have a few more days to enjoy it all.

One thing that has jumped out at us are the prices. We came prepared, with a bunch of snacks for the hikes and our own water bottles and a mindset that spending a ton of money won't make this little paradise any more enjoyable than it already is. But still, it's Hawaii, so tourist prices should be expected. The one that sticks with me is the cost of hotels. We are paying $109 a night at the Ramada which seems fine, I guess, when compared with the main hotel for the conference, the Hilton Hawaiian Village, which charges an astounding $190 a night: supposedly a discounted rate. The grounds of the Hilton are pretty amazing, with pristine beaches and a lagoon right at the footstep of the hotel, hula dancers by the pool, fireworks every Friday, and, somehow, an outdoor habitat with turtles, koi, and, yes, penguins. Still, and I don't mean to insult anyone who enjoys such a stay, it still seems absurd that a lot of these people are presumably paying several hundred dollars, every day, just to be there.

I was reading a thread over on Mr. Money Mustache's forums the other day, and it got me thinking about how one really should consider the prices of things. The original poster, along with his partner, grossed about $500k a year, and had trimmed their spending down to about $120k per year. And this is with a paid-for home. Besides his original question, the details of the poster's spending brought about a wave of criticism, stating that this kind of spending is ridiculously excessive. Some posters went on to ask if such spending was the result of setting buckets of money on fire. This sort of response might be expected: on a site built on the power of frugality and badassity to achieve financial independence, how can one justify such a luxurious existence? It is the Hilton vacation being experienced all year long.

The average family makes a fraction of what this couple spends: most will never earn that much, in real dollars. That is to say, in order to live as this couple does, most families would have to go deep(er) in to debt, every year, forever. From that perspective, of course spending $120k a year seems foolish. But everything is relative, especially costs. To a poor family in the Philippines, our family's $25k or $30k annual spend probably seems ridiculously cushy...to the average family living in NYC, we seem like paupers.

But the simple math of early retirement shows that the only metric that really matters is savings rate. Earning $500k and spending $120k, this couple is ostensibly saving roughly 75% of their income. If that is the case, they are approaching financial independence at the exact same rate as a family earning $60k that is also saving 75% of its income. Invest a certain ratio of your income, and you reach financial independence as quickly as any other family saving that percent (assuming, of course, you start with the same percent of debts, assets, invest in the same ways, etc.). Everything else being equal, the dollar values are immaterial.

There are other factors to consider. A family spending $120k has a lot of wiggle room to improve its savings rate; a family spending $15k does not. And while both families might reach financial independence at the same time, a $3M nest egg can do things that a $375k nest egg can't. Taxes will also play a big role. But I'm most interested in how this relative sort of thinking applies to every day prices and purchases, and how we judge them. The $190 a night price at the Hilton is only acceptable or unacceptable in context, not in absolute terms. To a family earning half a million a year, it's probably a completely reasonable expenditure. To a family earning $40k, it's foolish no matter how you cut it.

I want to start changing the ways I view certain products or services. I have a bad habit of judging people who drive in fancy cars or eat at five star restaurants or who buy more house than I think they should, without considering the context of those purchases. I mean, what do I really know about any of these people except for what they're buying? Let's be honest: I only see a tiny fraction of their purchases, anyway. I'm prejudging them as idiotic consumers, and with very little evidence. Worse yet, I am doing so in the very way I hope others will not prejudge me simply based on my purchase of a used car or a modest home, or my choice not to eat out at five star restaurants. It's a hypocrisy that I wasn't entirely aware of. I'd like to break the habit.