Thursday, January 08, 2015

If People Didn't Have Debt

$15,000 is an interesting number because it is one I estimated with my head, but then also empirically proved out for several years of frugal, minimalist living.  Specifically, it's the lowest amount of money a person can live on comfortably in the US.

This assumes a lot of things.

That you don't have an insane commute.
You only have yourself to support.
You eat in and host at home most the time.
You go out occasionally.
You take a cheap road trip once a year.
The primary form of your entertainment is friends and conversation.
You never buy a new car.
And, you never buy frivolous (read-luxury) items.

When it's all said and done a single person can get by in the US, comfortably for $15,000 a year and enjoy a full and wonderful live.

Of course when I published this figure in various books, people would challenge me, questioning whether it was possible, even daring to doubt my veracity.  But trust you me, I went through the hell and penny pinching.  It's possible and it's well within everybody's ability to do it.

But $15,000 also happens to be a very interesting number in another regard.  For while sitting at my other bar I noticed an advertisement for a mortgage company.  And then an ad for a car.  And so I quickly hit the internet, found some online calculators, and started crunching some numbers.  Specifically, the TOTAL debt payments one makes over the course of their lives. 

Naturally, this varies person to person so I assumed what I believed to be the "average" American who takes on debt for these specific things at these specific terms:

$250,000 mortgage
30 year term
4.5% fixed rate

$20,000 auto loan
5 year term
7% fixed
12 cars over the course of your life

Student Loans
$80,000 (includes what you paid without loans)
20 year term (or whenever the hell people get around to paying those things off)
6% fixed

Credit Card Debt
$4,000 balance assumed in perpetuity
Forever term
16% fixed
Balance nominal from 15 till 75

Now, when you calculate the total loan payments for these four items you get:

House                     $456,000
Cars                        $280,368
Student  Loans       $137,554
Credit Card            $33,600

And when you add them all up you get:


Now a funny thing about that number is if you take it and divide it by the number of years you're expected to live as an adult (60) you get $15,125.***

And what do you know?  If you just refuse to take on debt for things like cars, education, houses, credit cards, and crap, you'll save yourself the necessary amount of money needed to support yourself for your entire life.

Of course, astute economists will point out that the numbers do not account for inflation.  And normal everyday Americans will point out who wants to live a life making $7.50 an hour  Valid points, but let me address them.

First, while absolutely 100% right, those figures don't count for inflation, they actually kind of do.  Cars you are constantly buying at higher and higher prices so we could just assume that $280,000 is adjusted for inflation.  Credit cards, well those balances will also rise with inflation, thus, adjusted for it.  And how many people buy just "one house," never buying newer or better, never refinancing, never taking equity out of the home to improve the kitchen?  Yes, that's what I thought.  About the only that isn't adjusted for inflation is tuition, but even that I wonder about given how corporations and employers are now all just so pro-"continuing education" forcing people a life long financial burden of never having to stop paying for education and training.  The point is, even if we were to adjust for inflation, that number would still come darn close to the $15,000 mark.

Second, the life style $15,000 a year affords.

Yes, who indeed wants that?  Why men with used cars that need repairing, living in studio apartments, never enjoying fondue at the latest and hippy trendy restaurant, who go to (GASP!) Goodwill to get their clothes!?  What kind of a life is that?

Certainly not one where they commute 500 hours a year, in a car they can barely afford the insurance on, to a job they hate, while they finance the hockey equipment for the children they can (also) barely afford, forcing both parents to work, while alienating their children in day care (also, barely can afford), driving the wife to divorce the husband, but not first without her racking up $20,000 in credit card debt for trinkets and bobbles she just needed to have, while dad buys himself a new Corvette to cope with the destruction of his family, and now two ex's who hate each other both fork over $50,000 a piece for lawyers so they can squabble over the remaining $5.83 in equity in their palatial McMansion.

You're right, they most certainly CANNOT afford that.  They can only afford books, conversation, coffee with friends, fishing, and black and white movies on Netflix.

The point is simply this (and one I think we already know).  If Americans simply got by with what they needed and not what they wanted, they would never have to take on any debt of any kind in the first place.  This would not only result in much easier and less stressful lives, but lives where you would not have to waste 4-8 years of your youth in college, making college obsolete for many.  The real issue many people have to solve for themselves is whether having "nice, but ultimately, pointless" things in life is worth the hell, struggle, strife, burden, stress, and pain the required debts to afford those things will foist on them.  And given what I've seen of average Americans and their obsession with "late model German cars" and "brand designer jeans," it most certainly is not.

Enjoy the decline!

***I did want to make the note that while the technical age for reaching adulthood is 18 (and when you subtract 18 from 78 years of life expectancy you get 60 years of effective adulthood), this is functionally wrong for Gen X and Millennials.  Since they do not move out of the house or stop fully receiving subsidies from their parents until the age of 43, the total number of effective adult years is really only 35 years.  When you take this into account the average annual savings of not going into debt results in an annualized payment of $26,000, much more than the original $15,000.  Perhaps this is why endebted and parent-dependent Gen X'ers and Millennials still have nice things despite negative net worths and multiple bankruptcies.


Anonymous said...

Good post. I recently wrote a post, similar in vein, as to the enormous benefits of avoiding debts at a young age.

I won't post my blog, I don't want to advertise, but my argument is:

In particular, the hidden cost of student debt. The £40,000 of student debt is dwarfed by the lost compound interest on meagre savings invested in one’s late teens early 20s, by that I mean savings you can’t make if you’re first studying and secondly paying off debt. I reckoned it to be £330,000. That’s a good pension plan sorted by the time you are 30. The important thing about pensions is not how much you put in, it’s how soon you start.

If young men avoided debt, marriage and kids and worked and saved throughout their 20s, then had kids in their mid to late 30s when they were financially and emotionally responsible, in other words, if young men were taught to be patient, well I can’t imagine how much better the world would be.

Not to mention at 35 with no baggage, some experience and money, man you would not believe how easy it is to get a stable, fun, hot young woman. You have the pick of the gene pool. My girlfriend is hot as hell, 24, gentle, educated, feminine and willingly and gleefully accepts my seniority.

christian said...

Well as long as a person has a plan on investing and creating vast streams of income then they can buy the car they want, the games, watches without using a loan or credit card..

idontwantutoknow said...

here in nj, its a little higher than $15,000 but overall I agree with you. let me refer you to this excellent article my mr.moneymustache:

Anonymous said...

Agreed with this post.

As a minimilist myself, I have managed to save a nice sum of money, and growing up as a child (early 2000s) I remember my father working 2 part time jobs and earning around just over $10,000. Guess what- he payed off his mortgage, loans, credit card bills, and now has his pension and an additional savings account of around $30,000.

It can be done, and I base this on my father's experience. Frugality is the key and personal finance management is essential as well.

Mark said...

I live a minimalistic lifestyle but 15 thousand is a little low where I live. The worst part of being poor is having to live around other poor people. You can sit and read a book but it's not pleasant if your neighbor is blasting rap music into your apartment. It's not pleasant when your neighbors break into your car or apartment looking for something to steal. It's not pleasant having hookers and drug dealers outside your door. The low cost lifestyle works but you need to relocate to a small town. In a big city you need more money to insulate yourself from a dysfunctional underclass.

Southern Man said...

15K per year is about $1250 per month. That's a minimum-wage 30-hour-per-week job at the local taco place. After mandatory withholding, FICA, Social Security, et cetera, you're down to a grand. It's not a living wage (not that it was intended to be).

A crappy apartment on skid row, even in the Midwest where housing is cheap, is $500 per month. Utilities (water, electric, gas) are another $100, minimum.

Health insurance is $200 per month, minimum, unless you do without and just pray that you don't break a leg or get hit by a drunk.

That leaves you $200 for groceries. Fifty bucks a week. Doable, if you buy actual groceries and cook yourself - which you advocate NOT doing in other posts.

I know people who live like this (and note that they have to have a car as well (which means gas and maintenance and insurance) to get to the job to get that lousy grand a month. None of them can afford health insurance. My son (who through poor decision making has that 30-hour-a-week minimum-wage job at the taco place) can't afford a car so he walks to work from his crappy skid row apartment.

Better to (a) find a way to make a living through your own skills and hard work or (b) get a STEM degree and convince someone that you're worth hiring. Living on 60K a year beats the hell out of 15K.

Karl said...

Good post. I'd have to adjust to $20k/year to accommodate my appetite for guns, ammo and cigars.

Pax Empyrean said...

Last year, I spent $9,000 total.

I have never taken out a loan for anything in my life. I got a job when I was 14.

Every car I've ever bought I paid for entirely up front, and none of them were less than twelve years old.

I went to a relatively inexpensive university. Paid for with money I had saved over five years of working ahead of time, and alternating semesters between attending school and working.

My entertainment comes mostly from reading, playing the piano (a one-time $1200 expense for a good electric piano that never needs tuning or maintenance), and video games, which I buy twice a year during the Summer and Winter sales on Steam, or Humble Bundles throughout the year. With this approach I spend less than $200 per year on video games.

At one point, I had a job making $13 to $16 an hour full time for three and a half years, and when that job was over with I went for *three years* with no income or support from anyone (no unemployment benefits, food stamps, welfare, nothing) and didn't run out of money.

Now I work about thirty hours per week for nine dollars an hour in a zero-stress job that lets me spend more than half of my time reading. No financial problems.

Stay out of debt. Get cheap hobbies. Have no dependents. It's pretty easy, really.

CurbYourOptimism said...

$15,000 surely is a very interesting number. I'm one of those minimalists who DO live off $15,000 every year, and do so quite well. Since I make almost triple that after taxes, I've been able to pay off all my debts and start on a nice cash pile in my middle 20s.

But $15,000 has also come up as the price of many foreclosures around Florida. I've considered moving from my current Midwestern hellhole and buy rental property down there, and with the price of foreclosures I could buy a few houses, fix them up, and rent them out.

I've considered starting up a blog covering minimalist living and living by realistic expectations (hence the name). Also, go read, his blog has greatly helped in my journey and looking towards further financial and job freedom.

Goober said...

This is a really good post as far as advice is concerned.

I'm afraid that the Boomers, among other things, instilled in the subsequent generations this idea of material success.

Luckily, a good number of the millenials seem to be largely ignoring those goals, and focusing on the goals that you describe in this post. They take a lot of guff for it (THOSE DAMN MILLENIALS! They don't have good jobs and will never amount to anything!)

But the upshot is that the Boomers infected us all with this "buy more, consume more that shows success" mentality that has lead to their lives, and lives of so many others, being unnecessarily burdened.

My grandparents lived for 50 years in the same small house - tiny, by today's standards - in which they raised four children.

The Bedrooms in my parent's house added up to more square footage than my grandparent's house did. My Dad also just finally paid it off at 60 years old, too, whereas my grandpa had his house paid off in ten years of purchase.

I can always tell when a Boomer builds a house locally, because it is absolutely ridiculously big. Stupidly so. Idiotically so.

I never understood this. Even if I was a successful millionaire who could afford a big house, I think I'd rather have several small houses than one big one - maybe on ona river somewhere, or up in the woods, as well as the primary in town.

We really need to shed the preconceptions that the boomers put on us all. It's not doing any of us any good.

nate w said...

I'm paying $18,000 /year in child support so I cannot test this thesis.

Oxford said...

Land down under here, real-estate is a little pricier but other things are a bit cheaper - I think the figure is in the right ballpark. I just saved my first $100K, and adding to it at a rate of $50K/yr. For lack of any other real goals I'd like to get the nest egg to a point where the interest payments alone could service a liveable income (cash-rates are a bit more generous here... for the time being).

I'm very fortunate to be in this position at all - I had a useless degree, student debt, car loans, parasitic girlfriends, typical gen-X slacker attitude. It could have gone so, so wrong.

Anonymous said...

Where I live, I didn't chose minimalism, minimalism chose me.

heresolong said...

I love the principle although I enjoy some luxuries in life and don't really want to minimize to that extent.

However, I bought a used Dodge in 1982 and drove it until 1989. Bought a used pickup in 1989 and drove it until 2012. Bought a used Dodge from my dad in 2012 and it is still going strong. Total car purchase cost in the past thirty two years (not including interest)for three vehicles, $25,000. I do admit to spending money buying a couple Harley Davidsons, however, but I've also put over 300,000 miles on them so I figure that's a good investment in "mental health".

Oh, by the way, my student loan runs 3% and my credit card (which I recently paid off) runs 7.5% so your numbers might be a little high for someone with good credit who shops around.

heresolong said...

Southern Man, Miss your posts, by the way.

One way to get around the need for a car (if you live somewhere with a half decent climate) is to live within bicycling distance of your work. Even here in the Pacific NW you can bicycle about 90% of the year if you don't mind rain and cold. I have a co-worker who bikes about fifteen miles each way. He is in incredible shape and spends almost nothing on gas, maintenance, etc. He has a cheap little Toyota for the times that he can't.

Survivorman said...

100% debt-free here!
And ~$15,000 / yr. is about what I came up with as well - mind you, I clear substantially more than that..

I have more toys than time to play with (or fix) them. Because..

(Wait for it)


Sunshine said...

I agree this is a good post, read it a few hours ago and did some reflecting on my life as an intentional "low income" American who prefers what everyone calls a minimalist lifestyle. I'm now 40 and if I averaged out my annual income over the years it would be around $20,000. The older I get, the more snobbery I hear regarding lack of personal wealth and lack of ability to buy crap no one really needs.

What am I missing out on? I've never gone hungry, never been homeless, have no debt, get laid, travel here & there, grow gardens, brew beer, and count the hours & days NOT working like a slave as what life is all about. While I constantly compare my current situation to others around my age, I just look at them - the men with fat red faces poised to have a heart attack at any moment and the repulsively obese women so overworked that they have lost the ability to take care of themselves.

Like commenter Pax wrote, I read a lot and consider it a nearly-free escape from this horrible modern world. "Cheers."

Anonymous said...

I thought the number would have been way higher than $15K

Anonymous said...

$15,000/yr (lets assume after tax)
is $1,250/mo

To be able to rent an apartment, the industry standard is to be able to make at least 3x rent.

$1,250/3= $416.66

Unless someone has a counterexample, there is basically no place in the United States in which you can get even a studio apartment for $416 a month.

Anonymous said...

You could get roommates or just rent a room in someone's house.

srhcb said...

Hibbing, Minnesota might be best know as the city Bob Dylan escaped from, and we did have two -27 degree days (so far) this year, but it's a nice place to live, with all amenities you'd expect in a small city, and access to year-round outdoor activities if you're so inclined. Plus, the rent is cheap:

Anonymous said...


Who said you have to live comfortably ?

Brian Tracy said that you win by a nose. Sometimes, the difference between comfortable and miserable represents only a few hundreds of dollars of savings over the course of a year. But repeat that over many years and invest those wisely and it can make a big difference in the long run.

I say, as long as your body can take it, don't choose comfortable, give it all you've got.

Anonymous said...

It's almost as if you anticipated the SOTU speech.

Anonymous said...

A year and a half ago, I bought a stone & brick contemporary house for $25,000 cash from Freddie Mac. The house is actually in a gate-guarded golf course community. It needs a lot of updating, and I am doing that gradually. I have enough money for the repairs, because I don't pay any rent or mortgage.

The neighborhood is very middle class and quiet, mostly retirees. No barking dogs, etc.

I am single and in my fifties, and live very well on $17,500/year.

Live in Mom's basement for a few years if you have to, and work as many hours as you can and save up enough to pay cash for a house that you like.

A nice-enough house in a nice-enough neighborhood is the gift that keeps on giving once it is fully paid for.