So What Are Quality Frugal Transportation Choices?

If you read this blog, you already know the importance of thinking it through in order to make a choice that is not only frugal but practical.  When it comes to transportation, for example, we see that motorcycles really do not fit the bill for a variety of reasons.  Yes, if you choose a tiny engine and are willing to operate the machine in the rain, in winter temperatures, in the summer heat, and beside tractor trailers on the highways — and if you are one of the rare persons who can manage to ride a motorcycle responsibly — you will save some money on gas costs.  But you will also simultaneously expose yourself to death and serious bodily injury, while regularly arriving at destinations soaking wet from sweat or rain and spotted with dead bugs.  Not very practical.

Likewise, we see that a bicycle really does not cut it in terms of practical frugal living.  At the other extreme, SUVs and full size pickup trucks are almost always a foolish waste of money, both on the front end purchase price and with the sky high maintenance, insurance, and gasoline costs that will follow.

When thinking it though, we also see that the Toyota Prius, despite its legions of loyal owners, does not make the grade — unless you keep it for many, many years.  Why?  Because the additional upfront purchase costs simply puts you to far in the red at the outset, meaning you will have to accumulate thousands of gallons of gasoline savings in order to make up the difference.

So what are transportation choices that are both frugal and practical?  Before getting to my picks, stop and review the working definition of practical frugal living.  Applying this to transportation, I expect for the choice to be one that is reasonably priced, safe, and economical to use.  It also has to be an option that can be used without undue burden, (e.g., if you will arrive at work sweating like a pig, it doesn’t fit the bill).  The choice also has to be one that will prove practical for the vast majority of your transportation needs.  This too requires thinking it through.  If you justify an SUV purchase because of the three times a year that you visit that off-road mountain cabin, only to find yourself commuting to work, by yourself (or even with one passenger). 250 days a year, you have made a boneheaded decision.  Low maintenance costs are also essential.  This is another reason, by the way, that motorcycles fail to make the cut.  Changing tires and brakes every 8,000 to 10,000 miles has no place in a frugal lifestyle.

Now, without further ado, here is my completely objective (NOTE: I have received nothing from any of these manufactures) list of vehicles that will serve you well in your quest to live a quality, frugal lifestyle:

The Nissan Sentra: In recent years, Nissan has really upped its game in quality.  My family currently owns a Nissan Sentra (pictured here) and a Nissan Versa, which is the compact line immediately below the Sentra.  Both feature excellent rides and handling.  The Versa is small, but the Sentra is surprisingly roomy inside.  The real surprise is the fuel efficiency.  I now have over 21,000 miles on the car, and my average fuel efficiency for the life of the car is sitting pretty at 38.1.  As I’ve previously written, I am not a big proponent of hypermiling techniques.  I am also not an all highway miles traveler, although perhaps half of my miles have been highway.  As such, this is an average MPG that can be achieved by the average driver.

The key to Nissan’s fuel efficiency is the continuously variable transmission or CVT.  Granted, it takes a little getting used to, but it is just no big deal at all.  The acceleration is still excellent, and once you realize that your transmission is not “slipping” you’ll quickly learn to appreciate its fuel sipping magic.

My only concerns with the current Nissans has been the two recall notices I have received.  One was for a faulty passenger air bag sensor; the latest has been for a small repair to the CVT.  The company deserves kudos for acknowledging these problems and addressing them (free of charge, of course) proactively.  Still, they do create inconvenience, and they give me some concern about overall quality.  But after two years of ownership, I’ve been thoroughly pleased with the first hand driver experience and do recommend the make to fellow frugalists.

The Hyundai Elantra:

As with Nissan, Hyundai has markedly improved the quality of its cars over the past twenty of so years.  Its cars now boast solid reliability, and several models, incl2016 Hyundai Elantra Limited on the Roaduding the Elantra, feature very impressive fuel economy.  Hyundai also stands behind its cars with a five year, 60,000 mile bumper to bumper warranty, nearly twice that of most manufacturers.  Hyundai also offers many fine options as standard features.

I have owned a Sonata and an Elantra in past years.  I drove the Sonata to over 150,000 miles with no major engine repairs required.  The Elantra was also relatively trouble free and much better on gas.  I was also impressed with the paint on these cars.  After some bad experiences with U.S. makes in the past, I really appreciated how well the paint held up on these cars, even after sustaining dents, dings, and all of those other annoying wear and tear markers of long term ownership.

I only have a few negative thoughts about Hyundai.  First, the batteries in both of my cars really sucked.  The cars came with Hyundai batteries, which died inside of three years each.  My cars also blew through light bulbs very fast, and I was told this is a common problem with the make.  I went through head lamp bulbs and taillights all well inside of 100,000 miles.  They are also very cumbersome to change.

In addition to these relatively small annoyances, my sense is that Hyundai has lost a lot of its competitive marketplace hunger.  Its cars used to be great bargains, but the prices have really moved upward in recent years.  I’m sure this is largely because word has gotten out and sales have increased accordingly.  But for whatever reason, Hyundais are not nearly the terrific buy they once were.

Still, I highly recommend considering the Hyundai Elantra (and Sonata).  For young couples or singles, you also can’t go wrong with the Accent.

The Toyota Corolla:

The fact that the Corolla is the best selling car of all time gives us some hope that the world has not completely lost its collective fiscal mind.  Toyota has sold over 40,000,000 of these cars and for good reason.  It is, and always has been, a wonderfully efficient machine that delivers 28/37 miles per gallon.  Despite taking some hits in recent years with recall problems, Toyota is legendary for its quality, and the Corolla is its poster child of all that is right with a low maintenance, dependable performer.

The first car that I bought out of school was a 1992 Corolla.  I put over 170,000 miles on it without a major repair, and I was still able to sell it ten years later for two thousand dollars.

My only beef with Corolla, and Toyotas generally, is how miserly they are with options.  Toyota seems to like this game of pricing cars cheaply only to jack that base model price up big time for simple options like cruise control.  I also don’t understand why a company so known for reliablity doesn’t step up and match the five year, 60,000 mile bumper to bumper warranty of Hyundai and Kia.  Chances are that you won’t need it, but that seems all the more reason why Toyota should offer it.

All things considered, however, you can make far worse choices than a Toyota Corolla, which should be plenty for a family of four or fewer.  If you must have something larger, the Toyota Camry is also a great second choice.


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Myth Buster: Is a Bicycle a Practical Transportation Alternative?

A popular website that touts the virtues of simple and frugal living is Mr. Money Mustache. The site shares the philosophy of a thirty-something (maybe forty or so now) computer engineer who retired young and now lives the good life from his Colorado home with his wife and young son. It is a popular site with younger adults, in part because it leads masses of young people to believe that they can, and in fact will, retire in just a short number of years by following some lifestyle changes to reduce spending and consumption habits. Younger adults also like the blogger’s pithy writing style, which makes liberal, cutesy use of occasional profanity that the young readers seem to particularly enjoy.

Although I am frequently alarmed by the unrealistic career planning decisions that many of the readers seem to have made (more on that in a later post), I generally have enjoyed the blogger’s posts. I agree with Mr. Money Mustache (or MMM) on many of his suggestions, and I too like the general simple living philosophy that he espouses.

But one theme that he constantly preaches that I just can’t understand is the use of bicycles for transportation. Basically, MMM suggests that everyone should move to a close commuting distance from the work place, buy a good, used bicycle, and ride it everywhere except for the occasional road trip. MMM touts the health benefits and the money savings that come from putting calories to work in lieu of spending big money on gas, maintenance, and insurance costs. He suggests that most errands – even grocery shopping – can be accomplished with the bike and a connected baby carrier.   You can even transport appliances with a bicycle and a trailer!  He even blows off the safety concerns of biking on major roadways, going so far as to call biking the safest means of transportation. Even weather, he says, is no problem as a dedicated “Mustachian” will find ways to bike to work even in the snow. Just bike, MMM says, and you are well on your way to financial freedom.

I have to admit, he makes it sound appealing. Saving money and promoting good health really does sound like a no-brainer, win-win, doesn’t it?

Well, keep in mind, the purpose of this blog is to promote practical frugal living. And I hate to break it to you, but bicycling everywhere is about as far from practical as attempting to live off of roadside berries.

Let’s start with this idea of biking to work. MMM feels anyone in pretty much any occupation can do this. Well, I’m an attorney working in the southeastern United States. Even though we generally dress in business casual attire on days when we have no office guests or out of office appointments, we still expect for our employees to come to work reasonably clean and free of odor. I think most office work places have a similar expectation. For half of the year, if I were to bike to work eight miles, I would arrive fairly soaked in perspiration, which is really not acceptable.

So, to be fair, I once started a thread on MMM’s message board to ask what people do about this issue. You wouldn’t believe some of the responses. One person explained that he keeps a week’s worth of fresh clothes in his office. When he arrives each day, he visits the bathroom, sponges himself off, changes clothes, and apparently stores the soiled garments somewhere in the office before taking them home. Another suggested that I could probably find a local gym or health club that would be happy to allow me to shower and change there. Really? Yes, I’m sure I could use a downtown gym’s facilities to shower and change each day – if I pay the $49/month membership fee. And that would kind of spoil the whole money saving idea, wouldn’t it? As for the first suggestion, I’ve never really managed to accomplish a thorough cleaning by sponging off select body parts before a sink, and I sure don’t relish the idea of trying this technique out in a law firm. Once I start sweating heavily during a workout, it also takes quite a while for my body to cool down in general. In other words, even after a shower, I usually find myself continuing to sweat for several minutes until the blood pressure and body temperature are fully back to normal. I really would prefer to just arrive faster, cleaner, and better rested.

Then there’s the whole issue of time.  Does it ever occur to these folks that they are throwing a good hour of so of additional time into biking to work and bathing and changing afterwards?  Is there any consideration given to the nuisance and value of time factors?

At any rate, when you find yourself making suggestions like these to justify an idea like biking to work, it is a pretty good indication that the idea is not practical. And bicycling everywhere certainly is not.

Of course we have not even begun to look at some of the more serious problems like biking home in the rain, sleet, and snow. Lots of fun there. Work is not always predictable either, and I’m not sure what I would do when I receive the call from a client who asks me to meet him that same day. I’m sure the client would understand if I said, “Sure, just given me an hour to bike down there, and pay no mind to the fact that I will be sweating like a pig.” The client or customer will also appreciate having to drive any time the two of you go somewhere together.

As for safety, I don’t know what utopia MMM lives in, but my community has had multiple cases of bicyclists injured or killed by drivers.  Just a ten second google search found this article on a Navy Seal killed yesterday on a bike.  Here’s another story of a bicyclist killed from the last day.  Oh what the heck, here’s one more biker fatality from just the last day.  And another.

For the most part, bicyclists, especially when on the road during rush hour, are viewed as major nuisances by drivers. In case you haven’t noticed, there are a lot of impatient drivers out there. Besides that, bicyclists bring a lot of hate upon themselves as they demand that the rules of the road apply to them – but only when convenient for the biker. Have you ever noticed how a bicyclist demands that he be treated as an equal motorist until he approaches an intersection? Then, suddenly, it is perfectly acceptable to move into the gutter to squeeze by stopped cars (including drivers who just moments earlier stressed through the process of getting around the bike in the first place), to run through red lights, to ride on the sidewalk and crosswalks, etc. Excuse the rant here, but the point is that bicyclists are not above road rage, (which they often incite), road hazards, and serious accidents.

Speaking from experience, I tried MMM’s idea by biking to my gym in the evenings. Just this two mile ride through city traffic was pretty scary, as cars zipped by me in the dark, sometimes barely clearing me. Dodging potholes and other road hazards was also a lot of fun. I quickly determined that this idea ain’t what it’s cranked up to be.

As for personal errands, if MMM is able to pile his groceries into a baby carrier, congratulations and God bless. For me, the thought of loading a gallon of milk, eggs, bread, canned goods, fresh fruit and meats, and other perishables in there, then pulling the load up and down hills to home is, in a word, nuts.

Then we come to the question of just how long do you really think you could tolerate this mode of transportation? Yes, a healthy young adult can bike a lot. But, trust me here, as you enter the late forties and fifties, changes occur to the body. In fact, the more active your lifestyle has been, the more wear and tear you will find surfacing to the joints. It will be interesting to see whether MMM and his disciples are still biking to and from the grocery store at age 55 when arthritis is coming into full bloom.

My suggestion is this: use a bicycle for exercise if you like (but, please, be responsible when doing so – no riding around in body tights, three feet into the travel lane, just far enough to obstruct traffic and piss off scores of motorists). But if you think a bike can largely eliminate your need for a car in day to day life, you need to think again.

And if you try this “lifestyle,” make sure your life insurance policy is up to date.

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Do it Yourself? Know Your Limitations First.

Here is another one of those “no brainer” ideas for saving money: do it yourself.  More than a long heralded principle of frugal living, “DIY” has become quite the vogue fad in the 21st Century.  With the advent of home improvement stores like Home Depot and Lowe’s and the popularity of home fix-it programs, everyone is jumping on the bandwagon.  We even have shows like Flip or Flop feeding the notion that there is money to be made by simply buying old structures, renovating  them, and selling them for huge profits.

We men are particularly vulnerable to DIY urges, as the belief that any man worth his salt has an inherent ability to use tools and fix things seems to run in our DNA.  The problem is this is a myth.  And as someone who speaks from experience, believe me, you can easily come out in the red — both in terms of money and time — if you embark on a DIY project without the necessary, skills or know-how.

Don’t get me wrong, I’m all for doing the work yourself and saving the money of outside help provided you know what you are doing.  This again is largely a problem for men, as our male pride constantly prevents us from acknowledging our inabilities and shortcomings.  So let’s learn from one of the great macho icons, Clint Eastwood, and realize once and for all that “A man’s got to know his limitations.”

I’ll give you a classic example.  I’ve tried a few times now to change headlight bulbs on my cars.  The first time went OK, but still harder than I expected.  The last two — both Hyundai cars, by the way — were nightmares.  For some reason, attempting to remove those damn lens covers and working my way around the various clamps and other impediments proved to be a nearly impossible task for this layman.  I sweated my way through it, but eventually could only get the bulb in half-way, without securing and aiming it properly.  So in the end I had to take the car down to a service station and have a mechanic finish the job.  The end result was that I pretty well ruined an evening, scratched up my forearm, and STILL ended up forking over twenty-five dollars, plus the cost of the bulb.

Now, wouldn’t it have been a lot better, from a quality of life standpoint, to have just paid the mechanic to do it in the first place?

Sadly, this is not just an isolated example for me.  Other times I have embarked upon do it yourself projects, only to find myself capitulating after a few hours of tortuous frustration.  The worst examples are those occasions when I get about three quarters of the way through before finally hitting a hurdle that I can’t clear.  The result is that I end up paying someone to do the job after all.  And, sorry, but there are no price discounts when the serviceman has to come out to the house to finish the job you have partially done.

Even if you do have the ability to do a given project yourself, consider your efficiency.  After all, it really makes little sense sweating and cursing for an hour or two through a project that you could pay someone thirty bucks to do in ten minutes. Time really is money, and many of us have a tendency to under estimate the value of personal time.

In the end, doing it yourself can be a great way to save money, but as with any strategy in frugal living, you have to think it through — preferably before wasting an evening and self-inflicting wounds.

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Does a Used Car Really Save?

Buy a used car and save tons of money.  How many times have you heard it?  It’s one of the top five suggestions on any “how to save money” article.  It has become part and parcel of the frugalist mindset, so much so that we now scoff at the poor, misguided souls who still buy new at the dealership.

But does a used car really save you money in the end?  The answer is nothing more than an uninspiring, “Maybe, under some circumstances.”

But usually it won’t.

I personally find used car savings the exception rather than the rule if, as I steadily preach, you think it through.

First, let’s start with the savings on price.  Conventional wisdom is that by merely buying used you will save 20 – 40 percent on the purchase price.  That can be true, no doubt, but as with everything you give up something for that price savings.  There’s not a seller on the planet who will give you savings of that magnitude unless the car has suffered a similar diminution in value.  Usually, it is pretty apparent by simply looking at the odometer reading.  The next time you find yourself attracted to a used car price that is at or near half the cost of the same model new, just look at the odometer, and you will probably find the catch there.  Chances are you will find that the car has a good 80,000 to 100,000 miles on it.  This, of course, means that you are very close to buying that car’s next major mechanical failure.  It may be an air compressor, a solenoid, an alternator, a timing belt and water pump — who knows?  But you can rest assured that you are 80,000 miles closer to a $500 – $1,200 repair tab, and probably several of them.

Remember too how many normal wear and tear items might be staring you in the face.  Unless the tires and brakes have just been changed, you will probably be replacing them in the next six months, as opposed to waiting two to three years before incurring that cost on a new car.

I also am willing to pay a bit more for peace of mind.  With a car, that comes in the form of warranty coverage.  If you buy a new Hyundai of Kia, you are buying yourself five years and 60,000 miles of bumper to bumper warranty coverage.  If you buy a used model with anything beyond 60,000 miles, you get no warranty at all.  With most other makes, you get zero warranty protection if you buy a car with a mere 36,000 miles on it.

Of course, you also have no idea how well the used car has been maintained by its prior owner — unless you are buying from a very close friend or from the very rare person who keeps full, accurate service records on file.  Now just think about how many times you have been too busy to change your oil at the necessary intervals and how many times you have done downright stupid things with your car that won’t show to the potential buyer.  Call me a pessimist, but I am less than confident in the diligence of the average car owner, and there is of course a reason why that owner is looking to sell the car in the first place.

But what if you buy a lightly used car, one still well within the manufacturer’s warranty?  That is a great idea if you can still accomplish significant cost savings.  The problem is that is very seldom the case.  Just look at a random example.  Let’s say you live in Atlanta and are in the market for a Toyota Corolla, a sound choice for the aspiring frugalist.  A quick review of Atlanta Toyota‘s website shows us a 2014 Corolla LE with less than 21,000 miles priced at $15,180.  The same dealership offers a new 2015 Corolla LE for $15,739, with other new models ranging into the $16,400 range.  Does the used car price sound like such a good deal?   Not to me.

Many will argue that better savings can be obtained by purchasing used from a private party seller.  But that option also is overrated.  With free, online access to Kelly Blue Book and Edmunds, any seller can easily determine the retail value of his vehicle, and just a quick browsing of Craigslist makes that clear enough.  It is also much more difficult to find a lightly used car for sale from individual sellers.  Again, check out Craigslist and what you will find is a plethora of cars with heavy miles.

In my opinion, the only practical used car option is a lightly used model, still within manufacturer’s warranty that is, for some reason, priced significantly lower than the new model alternative.  About the only time you will find this option is with a close out model or one that has been sitting on a dealer’s lot for a long time.  Dealers will reduce prices on models with “dust” on them.  Otherwise, you will find a better overall deal with a carefully negotiated new car deal and all the warranty and peace of mind benefits that come with it.

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Message to President Obama: There is No Free Lunch

Well, we just endured another nauseating, divisive, pie-in-sky, head-in-the-sand speech from Barack Obama.  Also known as the President’s State of the Union speech, Obama regaled his Democratic constituents with promises of yet new waves of big government tax and spend policies — like the very ones that have crippled American business, stagnated the economy, and left panhandlers still standing on the intersections of every city six long years since Obama’s first inauguration.  He has called for new taxes on the wealthy so that he can better spread the wealth to others.  In addition to the free healthcare and free cell phones that he doled out in his first term,  Obama now proposes to magically bestow free college educations and expanded child care benefits, the better to multiply the nation’s 18 TRILLION dollar debt.  And let’s throw in mandatory paid sick leave days while we’re at it.

Here is the message that Obama and his cronies just can’t seem to understand: there is no such thing as a free lunch.  Someone, at some time, must pay for these things.  Otherwise, you find yourself staring at a national debt several trillion dollars higher than the one you yourself blasted as unethical and unpatriotic six years earlier.  You see, Mr. President, college educations don’t come free, no matter how much we may want them to be.  They have to be paid for by someone.  The same is true for those cell phones and that health care you are “giving” away.  And by the way, even those nice new tax increases you are calling for would never come close to covering the tab.  As Margaret Thatcher once remarked, there is a central problem with socialism — eventually you run out of other people’s money.

But the most maddening aspect of this speech is the utter phoniness of it.  How can any responsible, intelligent person watch Obama’s fellow Democrats sit there and jump with applause for these insane promises, as if these new entitlement promises will save them from the yokes of poverty and despair?  Do people not realize that those Democrats are some of the wealthiest Americans whom Obama constantly blasts?  Like Nancy Pelosi and Mark Warner with their staggering, nine figure net worths?  Or Secretary John Kerry with his? Such a shame that Herb Kohl and Jay Rockefeller were no longer in the audience with their nine figure wealth.  Nonetheless, the list of obscenely wealthy Democrats who tout the “rich need to pay their fair share” mantra remains seemingly endless.

So here’s a practical idea: why don’t these multi millionaires step up to the plate, lead by example, and volunteer to forego those $174,000.00 salaries they take home?  Really, does a multi millionaire need that additional money anyway?  If they are truly so concerned about the plight of the less fortunate and outraged by the rich not paying their fair share, why not volunteer their services and live off of the paltry multi million dollar investment income that they receive annually (along with the lavish allowances, health care  (free of the Obamacare beauracracy, by the way), astounding “retirement” packages, and other benefits they will still enjoy)?  Come on you principled Congress folk, you want to give back to society; you want to help the less fortunate; you want to be good, altruistic “public servants.”  Go ahead and do it free of pay, like Ross Perot volunteered to do when he ran for President.

By now, you are probably thinking that I am one of those wealthy Americans who would be directly affected by the new tax increases Obama proposes.  I’m not.  Actually, I don’t come anywhere close.  I know, the prevailing wisdom is that I therefore should not care.  “Why do you care, you won’t have to pay it?” is the question I often hear.  Well, I care because I know that more and more spending by a government that is already $18 trillion dollars in debt is a bad thing; it is unsustainable.  I care because I look beyond the short-term and care about what happens to my children.  I care because I know that feeding this frightening tidal wave of entitlement demands is the last thing our country needs.  And I care because I truly hate this politics of division that Obama himself promised to change yet constantly takes to new heights.  It frankly pisses me off, in fact.

I also care because I believe people should be permitted to set their priorities, make wise choices, work hard, and spend their money on their own families and the causes they believe in rather than on the special interest groups that jump on the populist bandwagon.  I also believe every person should be permitted to spend and invest their hard-earned income as they wish without having political prostitutes stoke class envy and buy votes by promising to take that money and redistribute it.  I believe in working hard, living frugally, saving and investing, and providing for my family, rather than for the 50 million Americans who receive food stamps.

If you have followed and read this blog, you already know the importance of living frugally.  Rather than seek the mythical free lunch, you have perfected the art of frugal brown bag lunches.  You pay your own way while mastering cost reduction strategies such as aggressive coupon use and frequent shopper discount cards.  You monitor your vehicle’s tire pressure and avoid impractical gas-guzzling SUVs.  You seek to minimize insurance costs by dropping unnecessary coverages rather than force people to purchase insurance coverages they neither want nor need.  You know how embarrassed responsible Americans are by the nation’s irresponsible burgeoning debt and entitlement mentality.  You have, in short, perfected the liberating frugal mindset.

We need to tout the virtues of responsible, frugal living and self-reliance.  This runaway freight train of entitlement spending and class envy will get us nowhere good.

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Thinking Early Retirement? Beware of the Four Percent Rule . . .

Recently, USA Today revisited a popular subject amongst early retirement hopefuls: the so called “four percent rule.” The basic concept is that if a retiree withdraws no more than four percent of his portfolio per year, he should have enough to last for thirty years. The thought is that by limiting withdrawals to this amount, the remaining principal, along with investment earnings, should keep the portfolio cranking for years to come.

The question posed by the article is whether the 4 percent rule is still relevant to retirees.  The article concludes that it is, “somewhat” relevant – maybe – but only as a guideline.  In other words, the financial advisers interviewed in the article hedge and dance.  Later in the article, some of the analysts become more frank in acknowledging that the rule really does not work with today’s financial realities, including the low interest rate environment that has been in place for years.  In fact, just a few months earlier, USA Today published another article on the subject of the 4 percent rule that explained why the 4 percent retirement rule is broken.

It is unclear what induced USA Today to mute the alarm sounded by its earlier article.  (It may have just been a writer’s desire to recycle old material with a new spin so as to bolt before the New Year’s holiday.)  Whatever the motive, it does a great disservice because the four percent rule is anything but a reliable rule of thumb on which to base retirement decisions.  It is hardly a concept for practical people to rely upon.

I say this for several reasons.  First, as previously mentioned, the rule was formulated at a time when interest rates were much healthier than they have been over the last several years.  We have gone from the days of six percent interest of 3 month T-bills to the current scenario of a near zero rate on the same vehicle.  Even the thirty year bond is paying a mere 3 percent, or half of what 90 day treasuries paid when this “rule” was formulated in the 1990s.

Why is this important?  Because retirees need to have a substantial portion of their nest egg invested in conservative investments.   Otherwise, they could find themselves promptly in the poor house as the stock market enters its next frightening bear market.  Just image the troubles a retiree would have faced if 80-90% of his retirement portfolio had been invested in stocks during the 2000 – 2002 bear run.  Think about 2008 when the market blew up and erased over half of investor’s portfolios.  Yes, it came back, but only after years of sweat and angst.  That’s no way to plan a retirement.

Another reason why the rule is no longer relevant is because it does not account for the minimum required distribution that the federal government imposes on retirees nowadays.  The basic rule here is that retirees are required by law to withdraw certain amounts from their portfolios — whether they want to or not — so that the government can be sure to collect taxes on the earnings before the retiree dies.  Yes, you can still reinvest the money once you have withdrawn it, but only after you have paid the tax man.  It is therefore a net loss to the portfolio that does the retiree absolutely no good whatsoever.

Remember too that we are living under a cash-starved government that is constantly on the prowl for new ways to take still more of your savings.  You already know that our government has managed an 18 TRILLION dollar debt, the interest alone from which adds six figures with the blink of your eye.  As the number of Americans on the dole increases at a similarly startling rate, and as government monstrosities like Obamacare take hold, the already unsustainable debt will spin more wildly out of control.  Remember too that the social security system is also cash-starved and unsustainable; ditto for Medicare.  As this happens, you can pretty safely bet that the tax erosion of your savings will become more and more dramatic over your lifetime.

The four percent rule also was created during the run-away bull market of the 1990s.  That was the time of “irrational exuberance,” when investors thought we had magically reached the perpetual land of milk and honey.  It was the time when dot com companies were rolling in wealth and success, just before the clock struck midnight in March of 2000.  How do those dot com companies look now?  Has the NASDAQ returned to that 5,000+ point high in the fourteen years since?  No.  Surely we can all agree that a crash that has still not recovered in fourteen years is a bit more than an isolated down year.

But what really shakes me up is how further distorted the rule has become by pie in the sky young people fixated on escaping the world of work.  Mr. Money Mustache, for example, is a very popular website devoted to “Early retirement through Baddasity.”  The site is run by a man who reports that he retired in his early thirties and now lives off of investment earnings.  It is, understandably, an extremely popular site amongst young adults who find the thought of retiring in only a few years very appealing.

Now, don’t get me wrong, I too enjoy many of the blog posts because much of the espoused “Badassity” pertains to frugal living.  The blogger also boasts an enjoyable writing style that reflects a laid-back lifestyle and a healthy philosophy on life.  Unfortunately, however, one of his keys to early retirement is an extreme take on the four percent rule.  In his post on the subject, MMM describes the rule as the maximum rate at which you can withdraw your retirement savings and never run out of money.  Explaining why he personally believes four percent is that rate, he then reasons that an investor can generally count on an average annual investment return of seven percent, while conceding three percent to inflation, and voila, the four percent from which to live appears.

This interpretation, of course, raises yet another problem, which is the eroding effect of taxes.  You see, as soon as you sell off four percent of your holdings, you will get to pay capital gains taxes on any gains.  See also the minimum required distribution of cash poor government discussions above.

And yet countless fans of MMM regale one another with their plans to retire at the age of 30 or 35 with absurdly underfunded nest eggs of $500,000 – $700,000.  Browse through message board threads on the site and you will be amazed at the confidence, indeed certainty, with which these young people assume their plans are rock solid.  How frightening is this?  Do these people honestly think these are realistic scenarios?  (As an aside, I am also always troubled by how few of these people seem to care about the prospect of providing such things as college educations, weddings, and basic inheritance to their children, but that’s another topic for another day.)

But, please, think about it pragmatically before you make a dangerous career decision on such faulty premises.  Do you really want to kiss goodbye a job (and a career) in a country that has a bankrupt government and an unsustainable social security and Medicare system?  Do you believe your nest egg will be perpetually safe in a country where one of two primary political parties flourishes by promoting class warfare and a Robin Hood philosophy of taking from the “haves” and giving to the “have nots?”  Do you want to make yourself dependent on the returns of an oversold stock market that is eerily reminiscent of the 1990s?  I sure don’t.  The prudent course is to err on the side of too much, and allow your children to benefit from any excess.


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The Evolution of a Frugal Mindset

If you really want to excel in frugal living, the first thing to work on is not so much your spending habits but your mindset.  All the rest follows. living, you see, is more than making deliberate effort to save money.  If is more akin to a philosophy, one in which the person realizes that there is more to life than material possessions.  In fact, as you become more advanced in the way of practical frugal living, you come to realize that material possessions are, in many ways, antithetical to a peaceful, tranquil existence.  You value simple living.

You realize, for example, that life is more enjoyable at a slow pace; that there is tremendous value simply sitting on the front porch watching the sun rise or set; that few things are more enjoyable than playing an old fashioned board game with your spouse and young children; that being pulled thee different directions at the same time, all with a cell phone planted to your ear is stressful and to be avoided.  You rediscover the tremendous sense of satisfaction that comes from completing a car repair or a do-it-yourself project on your own.  You realize that using a good, old-fashioned rake is far healthier, both physically and mentally, than annoying your neighbors by blasting a leaf blower for hours on end.  You appreciate that a bagged lunch from home is not only healthier and lower in cost, but that it can be consumed in far less time than a restaurant meal, thus leaving you more time for more productive activity.

Aside from these epiphanies, you also come to learn that SUVs serve little purpose and that a Toyota Corolla or Yaris can get you somewhere every bit as effectively and for more efficiently than a Mercedes.  Then, as you advance in your development of the frugal mindset, you even learn that the people who feel the need to drive luxury cars for such reasons as to “show they’ve arrived” are shallow drips who you do not need to worry about impressing.  Likewise, you appreciate the fact that simply paying off the mortgage on your existing home is a far wiser accomplishment than moving up to a needlessly bigger house in a higher end neighborhood and that the rationalized excuse of “outgrowing the home” is pure nonsense.  You come to realize that many of the pretentious people who fixate on vehicle and home sizes are up to their ears in debt, and you realize what the expression “All hat, no cattle” means, as described in Stanley and Danko’s landmark book the Millionaire Next Door.

Putting these realizations together, you will eventually reach that utopic point of financial independence — the point where you are fee of debt and your resulting savings are sufficient to cover your modest living expenses with or without a job.  You may well continue to work out of personal choice, but you are no longer chained to a job or a boss that you hate.  You accrue that cherished “go to hell fund” described by the millionaires interviewed in the aforementioned Stanley and Danko book.

Sound pretty good, doesn’t it?

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