# Your Money Can Work Harder than You Can

## By Mr. Money Mustache

## Mon, 30 Jan 2012 13:00:09 +0000

I’ve been adding up the number of hours I worked last year, just out of curiosity. The biggest burst of it took place in November and December, when I was renovating the new rental house.

Man, I sure felt like I was working hard at the time. Five days a week, for all of my available time. Designing, prying, cutting, smashing, carrying, building, tiling, climbing, crawling, bleeding, swearing, laughing, gluing, nailing, and on and on. I ate my lunches while walking around and continuing to work, and I barely had time on the weekends to catch up on real life, groceries, and cooking.

But when you add it all up, it was really only a little over 200 hours of work. At a typical solid working wage of $35 per hour (almost five times the US minimum wage), this adds up to about $7,000. It’s a good chunk of money, enough to buy a fairly new car or for a single person to live frugally for a year. So I was proud of myself doing this much work even during retirement (even though I won’t technically get paid for it until sometime this year).

But while I was doing all this real work, my old forgotten money collection was also working. My old stalwart rental house silently delivered two rent checks, yielding about $4,000 after accounting for expenses. The main house provided me with mortgage-free living, saving about $3,000 in interest payments compared to someone who had bought an equivalent house to me with no money down. Well over $1000 in dividends reinvested themselves into more shares in index funds, whose share prices also tend to appreciate over time as well. A lack of student loans, car loans, and credit card loans on the various material goods we bought over the years (and still use today) saved us another $1000 in interest expenses*. Investments made in home energy efficiency saved hundreds more.

All in all, the ‘Stash, which is simply money earned in the distant past that I invested instead of spending, earned at least $9,000 during the two months, while I earned only $7,000 working my ass off. I found this quite amazing, since this is a collection of assets (the money, not the buttocks, that is) that most people consider to be “not enough to retire on”.

What I realized is that it is very easy to end up with an army of dollar bills, tireless employees, that end up working much harder than you do. Mine have already almost overtaken me – to maintain my current lifestyle without any savings, I’d have to work extremely hard just to stay afloat. Even a short-term job loss would lead to disaster.

But this inequality will grow even further over time. Since we’re not spending everything the ‘Stash provides and are even adding to it occasionally, its earning power will tend to increase. Within 10-15 years, it will be doubling its current production, meaning I’d have to go back into Software Engineering to even keep up with it. As it grows, its output will dwarf our spending further and further, meaning the reinvestment rate will get closer and closer to 100%. By the time I’m at the standard retirement age, this Money Mustache will be producing so much income that I couldn’t match it even if I took two engineering jobs and worked them simultaneously.

If I had been crazy enough to keep working to my current age and saving at the usual rate, the ‘Stash would be several million dollars by now, giving off passive income of over $150k. If I continued working until age 65 and saving and reinvesting, it would be in the tens of millions, and the passive income would be over $100,000 per MONTH, inflation-adjusted. I could fund an empire of children and grandchildren who never have the pleasure of having to work for their own money, and keep them busy with private jet flights between family compounds in various countries. Which is of course the unwise path chosen by many of the world’s rich people today.

What I’m talking about is pretty old news. It’s the foundation of capitalism itself. But the sheer speed at which a snowball like this can form astounds even me. To me, it feels like I just finished school a few years ago. I look roughly the same I did as a 20-year-old with no savings, (save for a tiny bit of salt-n-pepa in the facial hair). I still have to show ID occasionally at the liquor store. I got the same jobs as my peers, led roughly the same lifestyle. But doot dee doo, I just skipped a few new car purchases and Apple-brand laptops and shopping mall sprees and self-imposed commutes.. nothing major, just some of the fluff – and WHOOSH – here is this sticky ball of cash now rolling along behind me, just about to run me over. How the hell did that happen so quickly?

So remember that when you’re making seemingly small money decisions as a young person. You can put that $100 bill into your pipe and smoke it, or you can roll it up and stick it to the cashball that you’ve started pushing along. Don’t be discouraged by the deceptively small size of the ball right now. The time from the first dollar bill until the time it starts out-working you is tiny, compared to your lifespan. You can roll it up now and then have it push you along nicely for your whole life, or you can take baby steps of saving for your whole life, and then have the helpful cashball appear just in time for your old age – if you are lucky.

Have a great Monday!

*Several people have written in to hassle me on this accounting method. If you think it’s wrong, you just aren’t thinking about it carefully enough.

Let’s use a house as an example:

If you choose to own a house, it becomes part of your lifestyle. It’s an expense, and if you like having a house, it’s also a benefit to you.

Now, let’s say you move into a $200,000 house and you choose to borrow 100% of this house’s purchase price, so you must pay interest on it. Your housing cost is now $10,000 per year. You could choose to pay off the loan with some of your savings, in which case those savings are now providing $10,000 per year of annual “return” to you. Or you could invest the savings elsewhere, but that is irrelevant – all that matters in this case is that if you use the money to pay off the house, it is providing $10,000 of value to you.

Perhaps you could invest it somewhere and make $15,000 per year. Fine. Now your cash is earning $15,000 per year, and mine is earning $10,000. That doesn’t make any difference to the fact that mine is still earning $10,000, as described in this article.

Now, you can repeat this process for everything you choose to have in your life. If you add a car to your life, it is an expense. Will you borrow it, and pay $1000 per year in interest, or will you use cash, and accept the interest savings as an acceptable return on your investment?

Every material thing in your lifstyle comes with a cost. You can borrow the money to buy it, or you can pay for it outright.

Every bit of money you own carries the potential to generate an annual return. Whether you use this money for investments, or paying for the material parts of your lifestyle, or a mixture of the two, is irrelevant. The money is still working for you.

Of course, if you have so many material things that they tie up ALL of your money, you have a highly material lifestyle and no cash left over for groceries. I could live in a million-dollar house with no mortgage. The money would still be “working” for me by saving me $50,000 in mortgage payments per year. But I’d still get into trouble, because I’d be living a lifestyle with $50,000 per year housing costs, while my assets only did $50,000 of work for me per year.

This is not funny accounting – it’s the CORRECT way to think about money and lifestyle expenditures. If you don’t understand it, you need to keep thinking about it until you do. Only at that point will you be able to rationally make the tradeoff between owning stuff, owning investments, and deciding how to use debt.