Spending Mistakes During Our High-Income Years Cost Us $1.3 Million
One of my primary objectives for this blog is to assist in the enlightenment of people at all income levels—but especially at high income levels—that they can pursue a different financial-life path. One that doesn’t involve consuming and spending yourself into a state where you are involuntarily trapped in your office job that you loathe for 40-plus years. In our society it is far too easy to run with the herd; to do what is “normal” and expected. And when you follow this wide and well-trodden path, you get exactly what is “normal” and expected: nearly a lifetime trapped in work and maybe a retirement at age 65. If you don’t have a heart attack and die before then.
In my experience as a highly compensated corporate attorney working at a white-shoe “Big Law” firm where the starting salary for a first-year, know-nothing associate lawyer was north of $100k, the culture encouraged all of us to “outsource” as much as possible. When you’re earning a fat paycheck and working long hours, the attraction to spending and outsourcing is huge—even if you are by nature inclined to be frugal. And most of the people in this group were not frugal by nature, making the matter even worse. I once had a colleague facetiously tell me that he outsourced everything at home, “including screwing in light bulbs.” The comment was hyperbole of course but the meaning was intended: I don’t have time to do anything at home, so I pay someone else to do it all.
If you have ben reading along here, hopefully by now you have the impression that I’m fairly frugal by nature. But the pressures and demands of my high-income, high-time-commitment law career expanded and tested the limits of my frugality. There were many expenses that I look back on now and shake my head in disbelief and/or disgust, but at the time they seemed reasonable. So I decided to go back through my archived spending data (dutifully recorded in Quicken over almost two decades at this point) and see what I found in the way of wasteful spending during our high-income years. Certain expenditures came to mind without even looking at the historical data: lawn services, house-cleaning services, two-martini work lunches, and, umm … that country club membership (withhold judgment! I’ll explain). Others emerged as I walked through the spending category reports: huge eating-out totals, dry cleaning, pest control services.
With some trepidation I then undertook to quantify what the value of these wasteful expenditures would be today and in the distant future if I had managed them better and invested the waste. As a general approach, I took the total wasteful spend amount over time and then spread it ratably over the months that they were incurred to calculate an average monthly (wasteful) cost. I then used the aggregate return on the Vanguard Total Stock Market Index (using the ETF VTI) and converted it to an average monthly return and added the ratable monthly dividend return (approximately 1.9% divided by 12) to get an average monthly total return. I used this average monthly total return to calculate the value of the total wasteful spend today. I then calculated the future value of that amount at age 65 using an estimated (read: made-up) annualized total return of 8% (comprised of assumed annual market return of 6.1% and dividend yield of 1.9%). (Note 1). I chose 65 just because it is an accepted marker for retirement age. And note: my future value at age 65 calculations only include wasteful expenditures over a 15-year working career (at which point we cut most of this crap out), not a 40-plus year entrapment period. Obviously over 40 years the numbers would be much larger. Even over a truncated 15-year entrapment period the figures are staggering. (Note 2).
So let’s take a look at the wasteful spending items (presented in order of dollar magnitude).
I calculate an additional $58,615 in my pocket today if we had been more judicious in eating out at restaurants. But at the time we didn’t think twice about eating out or grabbing take-out whenever we seemed too busy (and in our defense we were busy). But eventually it became a habit—and one that we de-valued because we did it so often.
We spent a total of $52,171 during 2001-2016 eating out. But not all of this was wasteful spending, and even if I could do it over we would budget a reasonable amount for this frolic. So I calculated an estimated base amount of $140/month (me and Mrs. JF do very well on about $30 for the two of us (we prefer take-out), and with kids we’ll be in the $50 range. But we did not have kids during all of these years, so I calculated this blended monthly base amount presuming eating out once a week at $35 a pop). Over 15 years that yielded a base amount of $25,200, and a calculated waste amount of $26,971. If we had invested that amount ratably over the months involved (in the US stock market index as noted above) I’d have an additional $58,615 in our stock investments today. At an annualized total return of 8% that amount would be $344,156 by the time I reached 65.
We didn’t start this luxury expense on Day 1 of our entrapment period. We waited a few years to fully adjust to our fire-hose of income, and so the cleaning services only cover an 11-year period. You know you’re a BSD when you need to pay a complete stranger to come into your home and clean your sh!tter. (Note 3). Avoiding this convenience would provide another $34,772 in our pockets today, and $240,163 at 65.
Country-Club Membership (aka, the “Bushwood Years”)
OK, let me explain. I’m really not proud of this one, but it’s not as bad as it looks at first blush. When we moved into our stealth-lifestyle-debt-inducing house 9 years ago, we discovered we were about 300 yards away from the fourth hole of a neighborhood golf course. That neighborhood golf course also has tennis courts, a pool, and a clubhouse, and calls itself a “country club.” (Note: this isn’t my neighborhood swim and tennis facility, which is about 100 yards away, and that we pay separately for the privilege of utilizing). I’ve played golf for about 20 years for recreation (nothing serious), and eventually we started considering joining. I wrung my hands over this one, but concluded that “we could afford it” (which was true enough I guess). This isn’t a stuffy fancy-pants country club with a six-figure “initiation fee.” I referred to this place somewhat facetiously as a “blue-collar country club.” And it was kind of fun. We played some golf and went to a few holiday parties. It really made us feel affluent. This was clearly a salve to ease the pain of my 60-80 hour work-weeks. But after stroking that $400 or so check for three Decembers in a row when we were never within 100 yards of the place, I woke up and turned it off.
Value today $31,847. Value at 65: $186,989. Ouch.
Over these 15 years we paid various lawn-service providers different amounts to come take care of our crap for us. I always felt like I was doing our kids a disservice when I was sitting inside with them doing something and we saw the guys outside cutting our grass. (Some may take the opposing view—time with kids is valuable and worth paying for—but I didn’t like implicitly telling them that we just pay others to take care of our obligations.) And when you pay someone $140 in January to come out and pick up a few pine cones, that hurts. So get out and cut your own grass. Asshat. It will be good for you.
Value today: $29,255. Future value at 65: $171,767.
While spending my 14-hour days in the high-rent high-rise office building downtown I would usually wander outside for an hour or so for lunch. I did this every day, unless of course a demanding client matter kept me at my desk. And I would routinely spend $10-$15 a day on food (there were plenty of fancier/more expensive lunches, but they were reimbursed). For a number of these years Mrs. JF was also working, and also eating out multiple times a week.
Now obviously some of this eating-out business is obligatory and helpful as you try to climb the corporate or professional ladder. You have to make partner, after all, if you want to retire early. But you don’t need to do it every day—especially if you don’t enjoy doing it, which I usually didn’t. You can do it strategically—when necessary and helpful—and otherwise pack your junk for the day. This would have saved me buckets of time in addition to buckets of money; in those days an extra hour at home every day would have been a God-send.
To quantify this one I recognized that bringing lunch on most days would have at least marginally increased grocery costs. So I computed a blended unit cost per day of $1.25, based on the idea that $1 per person per day in marginal increased grocery cost is a good estimate, then reduced the $2/day base to reflect that for a number of these years Mrs. JF was not going to an office and/or was not working. I reduced the total spend by the calculated base amount using this blended per diem rate. The result was a calculated wasteful spend of $12,031. Over 15 years this would have translated into $26,147 in our coffers today. An extra $153,519 at age 65. I don’t recall those sandwiches being that good. Or the company.
Ah, cable television. Everyone’s favorite punching bag these days. I was actually surprised it came in this far down the list, but at nearly $16k in present value it’s not to be ignored.
Cutting the cable earlier than 2012 was probably not a viable option for me—I wouldn’t have survived without live college football in the fall. So I used a target base cost of $50/month up to 2012 (not terribly frugal, but reasonable), and treated anything above this amount as waste. We really didn’t go materially above $50/month for cable until 2008 (thanks AT&T Uverse). And then beginning in 2012—once cable cutting was a viable option thanks to Netflix, Hulu, and Sling (live ESPN)—I treated anything above $22/month as wasteful ($22/month being a blended average cost for a combination of two of these services, which tends to be what we do).
The result was a calculated $9,919 in wasted dollars over 15 years. That translated into $15,950 in present value, and $93,649 in future value at 65.
Jack Bogle has long decried “the tyranny of compounding costs” with respect to our investments. Just as damaging in the context of our monthly savings rate is the tyranny of automated monthly expenses. During my high-income entrapment years I looked to optimize my time by putting as many “routine” expenses on auto-pilot as possible. The problem with this administratively productive practice is that it reduces the likelihood of assessing the value you’re getting from those recurring automatic charges. There’s something about manually making a payment that makes you think. And when layered on top of each other these auto-charges can create a systemic fixed-cost base that will keep you trapped in work indefinitely. Here I’m thinking of items like gym memberships, subscription services (cable tv of course), and … pest control?
This was another expense that we dutifully and blindly paid each and every quarter just because that’s what you do when you’re an affluent family living in a fancy-pants house in the suburbs. I mean, what if one of us had to encounter a bug in the kitchen one night when wandering in for a glass of warm milk? The shame would be unbearable.
The reality is that this cost is a placebo that we put in place because of accepted norms and is in many cases unnecessary. We’ve done without this service for more than a year now and noticed little to no difference in our quality of life. If a pest problem arises, deal with it. But don’t pay someone on auto-pilot just to come out and hose your basement with chemicals because your neighbors do. Over 15 years this totaled up to $12,698 in present-value dollars, and $74,556 at 65. (Note: we still spend north of $200/year on a termite repair and re-treatment bond. Every year I struggle with this one, but every year I have concluded that it’s still a worthwhile insurance investment).
Working Joes that want to be BSDs have to look their best, so obviously every garment must be professionally cleaned and pressed. And probably after each and every wear, right? Anything less would just be uncouth. At one point while at the firm I even succumbed to peer pressure and paid a dude to come into my office and pick up my dirty clothes to take to his dry-clean shop. Nothing says BSD like having someone put your newly pressed clothes on your door hanger while you’re on a conference call. And if you’re a total BSD you can pretend that you didn’t even notice him do it. That’s how important your call is.
Total spend over 15 years on old-school (drop-off) and fancy-pants (behind my door) dry cleaning was $5,370. Present value would be $11,672, and future value would be $68,533. Since leaving entrapment just over a year ago the Joe Freedom Household has spent a total of $8.05 on dry cleaning. I’m not sure what this was, but it wasn’t mine. T-shirts don’t need professional laundering.
As a BSD attorney I didn’t have time to drive somewhere to get a haircut. Waiting in a queue? That’s for ordinary suckers, not people who value their time so highly. Nope, I needed ultimate convenience and efficiency. So I used the “salon” in the bottom of my high-rise office building. This ran me $40 a pop. And of course Mrs. JF was visiting the local salon regularly too. And then there were the separate trips to the “nail salon” running at $40-$50 a shot.
In calculating the wasteful spend here I have excluded the kids’ haircut costs (I don’t think we overspent on that). Haircuts aren’t really elective—although when you achieve semi-retired status like me that is debatable—so I used a reasonable base cost of $30/month for two adults. This is a blended cost that reflects that Mrs. JF does not need a haircut every month. The net wasteful spend over 15 years totaled $2,478. This translates to $5,385 today and $31,618 at 65.
In the course of writing this post I’ve pitched the idea to Mrs. JF of having her cut my hair. She politely declined. Ok, she rudely and violently declined. So I’m going to try and do it myself. (Remember the scene from The Big Short where Dr. Michael Burry asks an interviewee: “Nice haircut. Did you do it yourself?” Awesome. Good thing I don’t anticipate any job interviews soon.)
Over an 11-year period we paid a security monitoring company $212/year to sit at the ready next to a phone in an underground bunker just in case a bad guy tripped our security alarm. In that situation, they could then deploy a professional to conduct the highly skilled task of calling the police. And remember, in a situation like this where every second counts, the police are only minutes away.
Over that 11-year period there were no instances of bad guys tripping the switch. There were, however, plenty of occasions where I opened the front door with bed-head while scratching myself en route to the newspaper in the driveway.
A total of $2,212 over 11 years would be $5,324 today, and $31,259 in 23 years.
After Mrs. JF and I got married I was shocked to learn that people—lots of them at some point in time—paid an annual fee for a service that would come to their aid in the event that their car broke down. I admit to having an affinity for insurance, and it gave her warm-and-fuzzy feelings, so I converted her individual “membership” to a family package and put it on auto-charge. Eleven years later we had paid a total of $839. Present value: $1,885. Future value: $11,067. This one still really sticks in my craw.
Add It All Up
Here’s the total present value and future value of all the wasted cash:
So if I had managed these items all along with the wisdom that I have today, we would have an extra $233,549 in our virtual pocket today, and a projected additional $1.371 million at age 65. Bummer.
But the point of this exercise isn’t to induce depression over prior spending mistakes. We all make them. And the sooner we learn from them the sooner we can turn them off (and create more time for the saved cash to compound and magically grow). The action-item here is that everyone—especially high-income earners that place a premium on convenience—needs to scrutinize and then re-scrutinize their recurring expenses. The payments that we put on an auto-pay for administrative convenience are particularly insidious. I suspect that nearly 100% of high-income BSD-types have significant thoughtless wasteful spending every single month; it’s just so easy to justify certain exependitures on the basis of “I’m busy and this makes life easier” or “I’m too busy to even look at my monthly expenditures. I’m sure it’s fine.” But they add up fast. And one day you may come to your senses and realize that you wasted $1.3 million indulging your BSD status.
Note 1: Some may assert that using an 8% total return figure to calculate future values over the coming 23 years is too optimistic. Fine. But it seems to me to be as reasonable a projection as any other. But I’ll point out that Jack Bogle and Jonathan Clements have recently made persuasive arguments that total stock returns (including dividends) over the coming years could be in the 4-6% range. At 4% my calculated future value drops to $575,632. At 6% it drops to $892,099. But $1.3 million sure is a catchier headline.
Note 2: While my total entrapment period was technically 16 years, because my Quicken data for 2000 was categorized differently, I have largely excluded it from my calculations. I wasn’t willing to take the extra time to make the expenditure classifications for that year consistent with the next 15 years of data.
Note 3: For anyone not familiar with the acronym “BSD,” here you go. I’m using the first definition.