# When the Back of the Napkin can be Worth Millions

## By Mr. Money Mustache

## Mon, 24 Jun 2013 16:28:43 +0000

What’s with Mr. Money Mustache and all his funny-business math?

When you read the criticisms that sprout up around the web, you’ll often see people nitpicking over the accuracy of some of the numbers I present in these articles. You may even find yourself doing some of the nitpicking in your own mind.

You might feel that the assumed inflation rate or investment returns are wrong, or the bicycling data should be shown per mile rather than per hour. People even devote entire website discussions over the perceived inaccuracies in my recollection of how we saved for retirement.

“MMM uses fuzzy math and hand-waving!”, they say. Then they go off and feel better, feeling they have disproved the Tenets of Mustachianism and thus freed themselves from making any changes to their lifestyle.

This accusation is right – I do make up some fuzzy math at times. I’ll throw all kinds of unrelated formulae into the mixing bowl, estimating the dollar-value of being more sexy, or the annual cost of being a complainypants, and multiplying it all by an annual compounding rate pulled from my own hindquarters.

But although the equations are unusual, they can still be very useful. Because it turns out that life itself is very fuzzy, subject to incredible random variation and the splendid irrationality of human nature itself. In a world where you can take over entire countries using weaponry as gentle as an Optimism Gun, how can you argue that your own personal expenditures will invariably inflate at exactly the same rate as the Consumer Price Index?

So today, we are going to learn about why making your best wild-assed estimates (as seen on this blog) can still be massively more productive than making no estimates at all. And in fact, with the right practice and principles, the wild estimation can prove to be much more accurate than you would originally dare to assume.

Let’s use my friend Mark’s story as an example. Mark lives near me in Longmont, but he works far, far away in South Denver, doing some type of high-tech surveying work. It’s about 40 miles each way. As part of the job, he occasionally needs to drive on dirt roads, so he has decided he needs a high-clearance vehicle. But he also has two kids and a wife, so he wants something with four doors and lots of room. Here in America, this sort of wish list often leads to the Ford F-150 pickup, a spectacularly big truck with a very small cargo bed, big cabin, huge engine, and heart-attack level of fuel consumption. It’s the best-selling vehicle in the country.

So Mark visits the dealership, kicks the tires, and the dealer amazingly offers him the deal of a lifetime. The “regular” price is $45,000 or so, but just for Mark, this special model will be sold for only $29,000 with low-interest financing and a low downpayment. Score, right? Oh yeah, and we’ll roll the $5,000 of taxes and dealer and registration fees into the loan for you.

This is where Mr. Money Mustache would come screeching into the dealership on his bike, with Fuzzy Math guns blazing.

“Mark, you damn fool! This truck is going to depreciate about $25,000 over the next 10 years. Your insurance will be $10,000 higher than it would have been driving an older car over that period. Gasoline at 15,000 miles a year will cost you $18,000 more per decade than it would to fuel a normal car. All told, you are wasting over $60,000 every 10 years with compounding, just by choosing this ridiculous truck over something like an equally capable, much-better-handling 2003 Subaru Outback wagon or maybe a Honda CRV. And that’s before factoring in about $100 grand in commuting costs you could save by moving closer to work or getting a closer job!

See, the standard shopper thinks, “Leather seats, big engine, room for the kids. Sold!”. When instead he needs to be thinking “A hundred and sixty thousand dollars!? I don’t even have a grand in my checking account! Maybe I need to buy something other than this truck”.

Although you could nitpick over the estimates I took at his insurance costs or the future price of gas, if you did, you would be missing the point. Just being in the right ballpark would have allowed me (and Mark) to avoid a potential $100,000 mistake. Avoid just 5-10 of these over a lifetime, and you’ve made the difference between “Broke” and “Retired”.

For most of us, even mundane financial decisions can lead to dramatically different outcomes. But you can’t always see those outcomes in advance if you’re down on the street making decisions with your emotions in the driver’s seat.

It is well known that most consumers, and even some of the newer arrivals to this blog, make shopping decisions emotionally. Meanwhile, I’ve always behaved more like a Vulcan (or an engineer, which is closely related), attempting to apply some logic to each purchasing decision. One reader even critiqued this blog‘s approach*, pointing out that not everyone thinks like an engineer.

But that is exactly my point: to build wealth efficiently, you should act a bit more like an engineer – trying to let go of emotions and put more logic and basic arithmetic into your decisions. You need to learn to do a bit of engineering on your own finances.

The reason is that at moderate incomes, the margin between poverty and wealth, middle class and kickass**, is very narrow. Spend most of your money and you’ll be almost-broke forever. Spend just a bit more and you’re bankrupt. Cut it down by just a factor of 2, and you’re financially independent in under 17 years. Cut it in 4 and you’re free in about 7. But without doing the numbers, trying to accomplish this is like trying to swish a basketball from an airplane.

You don’t need a fancy degree or even a scientific calculator to handle the basics. You just need to be willing to try your best to figure out how much something is going to cost you over time. Even if your numbers aren’t perfectly accurate, this is far better than the cautious person’s result of not trying at all. And here are a few guidelines to make your job easier.

- Define the best and worst case scenarios. This will give you a range of possible outcomes, and you know the right answer is somewhere in there. Then take your best guess for the numbers, and use that as your guide. Example: Building this deck will take me between 8 and 16 hours. Doing the work myself will save me the $1000 the contractor had bid, so my pay rate will be between $125 and $62.50 per hour. Since even the worst case is quite good, I will do the work myself.
- Use a search engine to quickly find scientific data or statistics instead of anecdotal evidence. The recent bike safety article is an example of this: Anecdotally, I feel like biking is perfectly safe, since I do it every day and never get hurt. But instead of using my own experience, I looked up official statistics and found that bike accidents do occasionally happen, allowing for more accurate decision-making.
- Always try to figure out your per use costs. This leads to shocking revelations, like how upsizing to a 7-passenger vehicle might cost you $1000 per hour for the amount of time you actually spend carrying 7 passengers. In my case, this decision making process has forced me to consider selling my construction minivan next year.
- Divide annual savings by the money spent to get a return on investment figure. If it’s higher than 10%, you have found a smoking good life optimization and need to put it into action. Solar panels, tankless water heaters and LED light bulbs often do well when you evaluate them this way.
- To calculate a weekly expense compounded over ten years, multiply the price by 752 (so a light restaurant habit can easily be $100,000 per decade)
- For a monthly expense, multiply by 173
- Be Reassured: approximate math and educated guesses can be deceptively accurate. This is because you tend to make random errors on both sides of the right answer. These random errors tend to cancel each other in the equation and you end up roughly right. I’ve seen this over and over again in my house building, fitness, investment, and spending guesses over the years. It’s not an exaggeration to say that my wild-ass guesses are the reason I was able to retire at 30, and they’re still coming through for me today. They may sound bizarre to the uninitated, but they’re not really all that bad.

Earning more money is often best accomplished with emotions – make people feel good about working with you, and they’ll want to pay you more.

But actually keeping this money in your life requires a bit more hard-nosed practicality.

You can do both.

* To the Pressing Pause guy, I need to offer a bit of a rebuttal. I am of course aware that the battle for frugality is an emotional one rather than a logical one, silly. That’s why so many 350+ posts on this blog are philosophy-oriented. If it really were just about math and spreadsheets, you’d only need one post with a few equations in it, and everyone would say “Aaah! Early retirement it is, then!”.

But people can be made to trust the statistics, if we present the case well enough. Examples include the safety of airplanes, investing in stocks, donating to distant charities, voluntarily paying taxes, and even believing in currency itself, as explained in the post about good old-fashioned trust.

** That Middle Class to Kickass post is often subject to its own nitpicking of the same type. People often complain, “Middle class!? The imaginary people in this article are making $140,000 a year – that’s super-duper-upper-income!”

Which is again missing the point: the concept of frugality and an efficient lifestyle costs becomes even more important as you move down the income scale. If you don’t like to read about what cutting cable TV does to a $140,000 budget, see what magic it does to a $25,000 budget instead. To figure it out, just bust out your calculator and do your best to run the numbers. You’ll love the results.