Updated on 10.16.14

Continuing The Discussion: When Does It All Pay Off?

Trent Hamm

Over at Get Rich Slowly, J.D. posted an interesting discussion on the question of when the payoff comes for all the work of being frugal, saving, and investing. To quote Annie:

I look around and see people my age buying expensive condos, carrying expensive handbags, taking trips to Iceland and Mexico and Spain. I know that some of them have accounts at the Bank of Mom and Dad, and others are paying for everything on credit, but sometimes I wonder what I’m doing wrong. I went to college, I make… not a ton, but not peanuts, I try to live within my means, and yet I feel poorer the older I get. Yeah, I’ve got a great FICO score, but what good is that when I can’t afford to buy a home — or even merely move to New York, where there are more jobs in my field?

In short, I’ve been questioning my financial decisions lately. I have become quite depressed because I feel I am falling behind my peers. Should I be putting less in my retirement fund so I have more cash now? Adjust my student-loan payments (right now I pay $270 a month, but I could trim it to $150 a month [but, of course, pay more in interest in the long run])? Am I being naive — do most people have help from their parents? I guess I feel frustrated, disheartened and snookered because I made all the “right” financial decisions and although I’ll be totally debt-free in three years, I am getting tired of this eggs-for-dinner crap. It’s like wearing sunblock (which I also do religiously): All of this effort had better pay off, or I am going to seriously be one angry (and pale) woman.

J.D. goes on to describe in detail the general philosophy that being frugal is worth it – in the words of Dave Ramsey, if you will live like no one else, later you can live like no one else. But what this person needs is something more tangible than that, and I think I can demonstrate why frugality pays off in the long run.

How Frugality Pays Off in the Long Run

Let’s say at age 25, Annie makes $30,000 a year, but she’s smart enough to realize that she should be saving 15% of this money a year. Let’s also say that Bev (also age 25) makes $35,000 a year, but she spends like there’s no tomorrow, to the point where she actually is wasting 5% of her annual income paying interest on her credit cards. They’re going to both get 4% raises each year.

At age 25

Annie only spends $25,500 on her lifestyle, while Bev spends $33,500. Bev’s lifestyle is going to seem a whole lot greater than Annie’s from a consumerist standpoint. But let’s give them some time and see what happens.

At age 30

Bev’s lifestyle is going to make Annie really jealous. During that year, Bev will run through $40,453.71, while Annie will only spend $33,156. However, it’s worth noting that Annie’s dropping 15% of her income into a mutual fund that returns 10% a year, while Bev just keeps spending.

At age 40, Bev and Annie meet up again, and suddenly Annie’s lifestyle is getting more similar to Bev’s. Annie spends $54,349 this year, while Bev still spends more by spending $59,881 that year. But Annie has more than $100,000 in investments right now, while Bev has nothing at all.

At age 50

Bev and Annie touch base again and their spending is almost identical (even though, remember, Bev’s job all the way through has been a higher paying job than Annie), with Annie spending $86,566 this year and Bev spending $88,639. However, again, Bev has nothing at all saved for the future, while Annie has $234,000 in her investments.

At age 60

Bev and Annie touch base one more time. At this point, not only does Annie have more money to spend than Bev ($129,425 to $126,161), she has a retirement nest egg approaching half a million dollars. Bev not only doesn’t have as much to spend as Annie, she doesn’t have a dime socked away.

In short, even though Annie is always making 14% less each year at work than Bev, being frugal means that Annie ends up with a lot more money to spend in the long run. More likely, at some point Bev will realize that she desperately needs to think about retirement and suddenly Annie’s long term plan will look golden to both of them.

If this example seems familiar, it’s because I wrote about a very similar situation in the past, but the point is still true: careful saving and frugal living trump everything, even the relatively higher salaries of others.

Annie, you’re doing the right thing and the numbers prove it. Even if it feels like you’re “slipping behind” your peers right now in terms of consumer goods, you’re setting yourself up for the long run, while they’re burning through their money right now. Stick with what you’re doing right now and soon you’ll be leading the race while the others are playing catch up for the rest of their lives.

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  1. Mitch says:

    For those who are playing along at home but aren’t comfortable with “numbers” yet, the model Trent is using here involves Annie leaving the principal of her investments alone but treating her mutual fund returns just like her wage income (i.e. spend 85%, save 15% which becomes part of the principal for the next year).

    For a more visceral/visual idea of it (sounds very McLuhan), throw it in a spreadsheet and do a line chart.

    I believe there’s a connection between the American ideas of “math–yuck!” and “talking about money–yuck!” I’m not sure if it’s just that it saves face to hide behind innumeracy (“I can’t balance a checkbook”) or if there’s more complicated relationships there.

  2. emma says:

    Somtimes peers are not starting from the same baseline at all – they may have a spouse or significant other to split expenses with; they may have a company pension when you have to sock one away; they may just earn more (I was making $80k at 28). I agree that she’s doing great but words like “depressed” in her narrative don’t sit well with me – she doesn’t have the personality to go off the rails and end up in massive debt so I think easing up on the loan payments a bit might help a lot.

  3. Stephen says:

    This is the feeling I have at the end of the month. My wife and I feel like we are broke at the end of the month. I just keep telling myself that we are investing a lot of money every month and we are probably light years ahead of other people our age.

  4. James says:

    Thanks Mitch.
    This funny thing called “math” generally requires explanation of assumptions and models and equations used…which Trent conveniently skipped over.

    I was just about to ask how Annie magically had more money to spend…you cleared it right up

  5. Tim says:

    when are people simply going to stop comparing themselves to other people? no one else should be determining what your values are and what “living life” means to you, except you. comparisons do not work, because everyone and everyone’s situation is unique. the comparison shown above presumes that everything else remains equal besides savings in x amount for x years. it doesn’t account for either of them having other associated expenses or capability to continue saving x amount for x years. unless you have clones for friends, comparing yourself to everyone else simply based on “the numbers” is absurd, useless, and futile.

    if you value having gadgets, budget for them. there will be a cost to doing so, either in delaying paying off all your debt, or taking longer to save for your retirement goal. it seems to me that there are too many people in the PF blogsphere that simply do not have short, mid and long term goals for their money.

  6. Drew says:

    I can definitely relate to Annie’s state of mind. Living frugally is not easy when there’s so much “social competition” (subtle as it might be) between friends, family members, and neighbors. Also, I think it’s more difficult to avoid a life of rampant consumerism now with a wife and kids that do not seem to appreciate the concept of delayed gratification quite as much as I do :-P

  7. Lisa says:

    Balance! When her car is paid off, she needs to take that payment and save for vacation somewhere fun. Plan for tomorrow, live for today! I remember struggling and feeling resentment toward being frugality. Then I read in The Tightwad Gazette by Amy Dacyczyn an article that your attitude and approach toward frugality should be one of adventure, fun, challenge and triumph in the now. She also commented on meeting your goals in balance. If Annie wants to travel she should. She doesn’t have to have her school loan paid off first. After a great vacation, if she wants a condo, she should start saving and make that her next adventure/challenge/triumph. Depending on where she lives, that could be by the time she is 30.

  8. Sarah Anne says:

    It’s funny because this came up for me just a couple days ago. I live in what most people consider ‘paradise’ (aka Hawaii); unfortunately for those of us who reside here permanently, it’s a nightmare financially. The rents are out of control, so much that many people still live with their parents, myself included. Normally this wouldn’t be a big deal if the jobs paid in proportion, but they do not. I am making right now as much as I was making in San Francisco in 1994. That’s 13 YEARS AGO.

    So the dilemna between spending and saving is a real puzzle because every cent counts. I recently had been saving 16% in my 401K and 10% in regular savings, and I just changed my 401K to 10% and my savings to 20% so I can have that money more immediately accessible. This isn’t saying I’m taking that money and partying, but putting so much into my 401K isn’t going towards purchasing a car, a house, or most importantly, moving off this island to a place with a better job market.

    It was really hard to make this decision because I did party everything away in my 20s and I am starting a lot further behind as a result, but there are a fair amount of things that are probably going to need to be addressed/purchased in the upcoming years, and trying to save what I was in my 401K AND more AND live wasn’t frugal. It was constantly broke, and when you’re in that situation where every month you just have nothing, it really wears on your self esteem.

    What each person does is their choice, but what was important for me was the fact that the more immediate things were future goals, and so in that light it was a lot easier for me to justify. But I totally understant on how frustrating it can be when you’re pedaling and pedaling and not moving.

    The book that has really changed everything for me is All Your Worth by Elizabeth Warren and her daughter Amelia Warren Tyagi. This book changed my life because it gives a realistic way to set your finances up, and it makes sure you include room for having fun. It’s an amazing book, and if you haven’t read it, I highly suggest you do; it might help you get your money issues in order. It definitely did with me.

  9. Trent Hamm Trent says:

    For those curious, All Your Worth is slotted to be the book review for the week of April 16 – 20. I can tentatively say I give it a thumbs up, though I’m not done with reading it yet.

  10. Mitch says:

    I think the awesome thing about the Get Rich Slowly thread was how many people turned out to encourage Annie, providing an alternate subculture to her condo-buying peer group. Social comparisons are rampant human nature. As people mature, they do become less important, but Annie is all of 28 and this is part of the learning process. Yes, she should definitely evaluate her personal goals and determine whether to back off on the loans or find different ways to have fun. However, putting things in perspective is valuable. (I think in my ideal planet everyone should learn some social psychology.)

    In fact, now she has two points of view, so she can have stereoscopic depth perception. Now there’s a super-power for you.

  11. MSMomsmoney says:

    One of the things your poster is not looking at, is are these people that are taking vacations, and living the high life now, are they going into debt to do so?

    I have been guilty of looking at others and saying, how do they do that? It’s not “fair”?

    Here is an example: A coworker of mine, is in her mid-30’s with two kids, married, I would say her and her husband make $135K per year. They just bought a house for $445K, they have lots, and I do mean lots of toys (the latest workout machine, 2 motorcycles, three cars, kayaks for all 4 of them, their daughter goes to private school, they have her in a specialized gymnastics class very expensive, well you get the idea)

    I know her husband is frugal. He types up a list for her, on what she can spend and puts it in her wallet.

    So I open the mail at work and distribute. (small office) Low and behold two credit card bills arrive for her at the office. One with 32% interest and one with 24% interest!! Her husband would have a cow if he knew about these.

    I guess my point is–don’t judge a book by the cover.

    Just because someone outwardly is living the high life, doesn’t mean that they are not inwardly hiding a ton of very expensive debt.

    I also think that we need to learn to enjoy what we are doing now. Enjoy those accomplishments of savings, and paying off debt. Also learn to do things that don’t cost money–or don’t cost much money–and truly enjoy them.

    Envy is just no good for anyone.

  12. Amy says:

    Yes, but…

    The part of her story that worries me is where she talks about not being able to afford to move to find better job opportunities. Frugality, financial prudence, avoiding debt…these are good things. However, an unwillingness to take any financial risks, or invest in oneself and one’s future…not so good. And why has no one talked about increasing her income? Freelance work in her field on the side, asking for a raise, looking for a job with a different employer, these are all possibilities.

    There’s such a thing as being too conservative.

  13. Annie says:

    I’m Annie, and to answer Amy: I am taking on a second job (which I kind of dread, since I already work 50-55 hour weeks, but what can you do?). My employer has told me that raises are non-negotiable (meaning that my 4% raise is all I get). So I’ve been looking for a different job for the last four months. I also sell things on eBay, which helps a little bit.

    Also, I do freelance! The problem with freelancing is that you can never know when you’ll get paid; my last gig took almost nine months! So while I know that I have $2k in freelance money due to me right now, I can’t really count on it being here in 30 days or even 90 days.

    Other people have mentioned the envy thing, and I want to clarify: It’s not that I want big shiny fancy things. It’s that I’m working all the time, not spending frivolously, and I have no flipping idea how people manage to get ahead.

  14. Afloat says:

    Hi Annie: Here’s a straight forward answer, if this helps. Based on my experience and that of my co-workers and friends, assuming you’re not relying on family or spousal wealth as a primary source of income, you really start to see the fruits of frugality (or feel serious affects of being a spendthrift) by your mid 30s. By then you’ve had a few years of work under your belt, you get to see your student loan debt drop, and your assets start to build compared to where you were before. It’s very gratifying.

  15. Schwamie says:

    I have learned a LONG time ago to stop looking at everyone else and focus on my own (and family) happiness. While we don’t have the biggest house (still bigger than most, but smallest on the block), and have very few “toys” (but I do have an extensive stamp collection), and do not have expensive travels (but we do have a family reunion every two years somewhere nice in the US), I am on track to have all of my debt gone (to include mortgage) in the next 10 to 13 years. Is that a long time? YES! That said, my family will also have a well funded retirement as well as 529 plans that will cover most (not all) of our childrens college. Combined my wife and I make over $125k a year. We have learned a long time ago to live somewhat frugal and not blow our money on everything we see. We plan to do a LOT of international travelling when we turn 60. That is 20 years away, but we will still take our family trip every two years to somewhere nice but not too expensive. We don’t believe we are denying ourselves anything that would make our lives easier or better. Again, that does not include buying the latest gadget or expensive toy. I have seen our neighbors come and go as we live in a nice neighborhood, but we are by no means the “Jones'” nor will we ever be. I can say that shy of losing our jobs, we will end up with more than pretty much everyone on our block when retirement comes around. This is the goal that all should work towards. This can be done regardless of income as my wife and I paid for our own education and did not have the benefit of starting out with a silver spoon. While I did grow up that way, my dad spent everything he got and as a result I didn’t get to go to college right away. I knew very little about how to live frugal but learned very quickly when I started out on my own at 18. I also endured a VERY long and expensive divorce. While this can set anyone back, perserverence and doing whatever it takes, can bring anyone out of the depths of hell and back on the road to freedom. I know I have spouted out an awful lot, but I do belive that Trent and his blog have set the stage for those who are avid readers the “guide” to getting their financial lives on track and to live a successful life regardless of income.

  16. anna says:

    I am so fed up with hearing about this “10%” per year or “9%” per year. WHERE do you get 10%?? If I knew, I would take it! Someone please tell me…

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