Cliffs Notes: Triple Value

This may be a little bit Meta, but tonight’s blog post will be a blog post about another blogger’s blog post.

(There are some blog posts that are so good, they demand separate blog posts about them.)

The first such blog post that comes to mind for me is Mr. Money Mustache’s life altering post The Shockingly Simple Math… which I’ve referenced several times before on this blog.

But this past week I made references to an excellent article by the Mad Fientist entitled The Triple Value Of Income.

Before you read another word of mine, I urge you to click on the link above and read this article in it’s entirely. Then come back. There will be more…

There is nothing to see here…proceed to Mad Fientist

…. Welcome back. Wasn’t that great?

So to sum it all up in bullet points (italicized bullet points represent additional points that I am making.)

• Each dollar earned and spent today achieves only $0.80 of value because of tax loss.
• I would actually express this somewhat differently: each dollar spent today actually costed you a $1.25 of wages.
• In my particular case, each dollar spent today actually costs closer to two dollars due to my higher marginal tax rate, FICA taxes, and state income tax.
• A dollar not spent and invested in a taxable account for 10 years yields $1.45 of present day value assuming a real 7% return on the stock market.
• Note that this is assuming only 10 years of investment not 30 as is the case below with retirement accounts.  If invested over 30 years the new value would be $5.33.
• A dollar not spent now, and invested in a tax advantaged retirement account (401(k), 403B, IRA… Etc.) for 30 years will then be worth $6.70, assuming a 12% marginal income tax bracket in retirement.
• A dollar not spent now, matched dollar for dollar by an employer, and invested for 30 years will be worth $13.39 in retirement.
• If that $13.39 is not pulled out in retirement and is instead invested in a bond at a yield of 3.5%, then you will make that original $.80 of value (had the the dollar been spent immediately,) every two years without losing any of your principal!
• That last point is an excellent example of the compounding nature of stock returns; small changes over long periods of time yield dramatic results.

So there you have it, a very compelling argument to maximize your savings!

If you’d like to figure out your effective income based on different savings strategies, the Mad Fientist has a nifty calculator for you to play around with. Check it out! You may find it very motivating.

Here are some additional philosophical reflections on this article.

This discussion very much goes to the question of “what is wealth?” I think the common conception in our culture is that wealth means having lots of money and spending it on nice things.

This article kind of flips that conception on its ear.

When money is looked at from the Mad fientist’s perspective, Spending money now becomes the opposite of wealthy behavior. True wealth is a function of saving and discipline.

His calculator is actually very conservative. For higher income earners like myself the marginal tax rate is much higher, and so the actual benefit of tax exempt savings is much much greater.

This article elegantly drives home the power of tax-deferred savings. We should all be doing everything in our power to maximize our participation in tax-deferred savings vehicles such as 401(k)s, IRAs, backdoor Roth IRAs, and health savings accounts. These are all powerful wealth multipliers.

The counterargument to all of this, is the point that his mother originally made. Sometimes it’s better just to spend money and not think about it so much.

But I would add an addendum to his mothers counterargument. Spending money only really makes sense if not spending it costs you (or others around you)  happiness. Spending mindlessly is pretty much always a waste in my book.

What are your thoughts?  As always, comments are welcome.