These costs match my own cost of living when I was working full-time in the US as a highly-paid software engineer. So you could look at both columns as Louie2006 vs Louie2010 if you want to make it an apples-to-apples comparison.
Also, it’s an established fact that people spend a constant fraction of their income on housing no matter how much income they have in the US. Look at the reference for my cost data. Groups with wildly different incomes all the way from $25k/yr to $80k/yr all spend between 32-37% of their income on housing. So until I see research showing me otherwise, I stand by my use of fractional income costs of living for housing, transportation, and food budgets.
Groups with wildly different incomes all the way from $25k/yr to $80k/yr all spend between 32-37% of their income on housing.
This simply indicates that as people get richer, they demand better housing. I live in Manhattan. I could get the same apartment if I go on to be an associate at a law firm making $165k a year or a public defender making $50k. However, if I’m doing the former, I’m probably going to spring for a nicer apartment. If my primary goal were saving money, as is implied in your job comparison, I could easily live in the PD’s apartment on an associate’s salary.
The fact that most people who can save big on housing choose not to is not applicable in your hypothetical; to the extent that it is, more expensive housing implies higher quality of life.
The numbers you quoted are averages for each ten-year demographic between 25 and 75, plus the tails. There’s no mention of variance, and I would expect someone employing rationality techniques to manage their finances to be an outlier.
Personal anecdote: My own finances as well as those of six of my friends fall well outside those bands, with housing costs around 13-23% of income. We’re all highly-paid software engineers between the ages of 25 and 30, and none of us have families.
Edit: I forgot to include utilities, so my friends in NYC actually edge the housing cost range up to 23% or so.
Bravo! Your housing budget is quite remarkable. I wasn’t able to do so well myself back when I was working full-time in the US as a software engineer. Do you track your finances with Quicken or some other software? Could you calculate your remaining income from 2010 after subtracting out taxes, rent, housing, transportation, and food?
It must be much higher than the 4% a typical American in your position has left. I’d be curious what the best case real world numbers are for people in your situation who are doing their best to optimize.
Also, I’m assuming you aren’t just taking money out of your housing budget and directing it into an expensive car right? If you don’t mind me asking, what are you directing your excess income towards?
It must be much higher than the 4% a typical American in your position has left. I’d be curious what the best case real world numbers are for people in your situation who are doing their best to optimize.
Which was on response to:
Personal anecdote: My own finances as well as those of six of my friends fall well outside those bands. (Emphasis added.)
You still seem to be missing the point. Statistical averages, even in percentage form, cannot be blindly projected across the entire income scale. Someone making $1M a year does not spend the same percentage on food as someone making $40k.
And what does it matter if he takes money out of his housing budget and directs it towards an expensive car? The point of disposable income is that you get to spend it on things you want. That includes nicer housing, restaurant meals, and fancy cars, the value of which is ignored in your calculations.
I track my finances directly in a CoffeeScript source code file and use a simple home-brewed software library to compute my net liquid assets and (when necessary) my estimated tax payments and projected tax liabilities. You’ve reminded me that I really should be using something like Quicken for finer-grained analysis, so I’ll look into that and post my numbers later this week (edit: one second thought, it doesn’t seem worth the extra friction).
My living costs followed a general upward trend that leveled off in late 2009, but my salary data is extremely messy for several reasons:
I had no grasp of what I was worth until 2007.
I had no interest in anything beyond emergency savings until mid 2009, and preferred to gamble on startup equity being worth something, reasoning that I was in my twenties and had plenty of time to settle down later.
I was too personally attached to the startup I worked at until early 2010.
It’s hard to imagine changing my past since it’d mean giving up several of my current friendships, but the decisions I made in reality were emphatically the wrong ones from a financial perspective: I worked at-cost for six years and left several hundred thousand dollars of potential salary on the table.
(At-cost was both the mode and the mean, but some months were significantly higher and some were unpaid.)
Here’s what I’ve realized in the last two years:
Startups are harder and more stressful than normal jobs, and as you get closer to founder-level the effect intensifies.
I can get a competitive salary even if I choose to work for a startup.
Savings can be used to fund my personal projects which:
are more fun than work;
might generate revenue;
could seed a startup of my own;
will hopefully improve the world.
Savings can also be used to vote for causes I think will improve the world.
There are risks: The labor market for software engineers may cool off, my costs may spike if I decide to start a family or have medical problems, and I may choose or be forced to retire.
I’m still determining the split between my own projects, other causes, and risk management, but my personal projects decisively dominate any significant increases in my personal consumption, which is why I don’t exhibit income elasticity for housing, why I use public transit instead of owning a car, and why I don’t eat out very frequently.
Also, it’s an established fact that people spend a constant fraction of their income on housing no matter how much income they have in the US.
It’s an established fact that people who live in the US don’t suddenly decide to spend a year in Australia. Therefore, your plan fails, it just doesn’t happen.
Respectfully, I do not understand what your comment means. I didn’t think the author of this post thought that even 5% of the 300 million or so Americans would try to move to Australia any time time soon. But some much smaller fraction of Americans do, maybe even suddenly. The author of this post has offered facts to suggest that this could be rational for some people. For those people, how does this plan simply not happen?
Louis is contrasting his personal experience with both his personal experience and demographic averages. What Louis did is not average; and there are other outliers who are not spending 32-37% of their income on housing. In fact, when he suggests moving to the outback he is simply rephrasing a suggestion of “spend less on housing”. Moving to the outback and getting a job as he describes is one way of doing that. Living under a bridge and showering at your gym every morning might be another.
He is attempting to equate the micromanagement of optimal spending practices within a US city environment and culture with the big leap to go ahead and move to the Australian outback. Neither or these things tend to happen so he claims the right to say ‘you too’ on your ‘fail by default’ point.
Unfortunately this obscures or ignores the critical insight into human psychology that you allude to here with respect to setting up ‘succeed by default’ scenarios, particularly with respect to choosing critical culture and environmental factors.
If we are constructing advice for typical Americans, then this post presents good advice. But the target audience is stated to be the people who can follow counterintuitive pieces of reasoning, which is why insights into human psychology that oppose explicit reasoning shouldn’t be the issue (for the stated goal). From the post:
This, I think, is a special opportunity for rationalists, an illustration that we can get better life outcomes from our investment in rationality—better outcomes such as low-stress jobs that leave us with ample discretionary income and enough free time to pursue whatever else we’re interested in, obtained by being willing to break habits and think in numbers.
There nevertheless remains an enormous difference between the big, perhaps drastic but more importantly intrinsically decisive changes to environment and a commitment to try to resist cultural and environmental pressures as they are currently experienced. Both are big hurdles but their nature is very different. Once they have made the choice to make the drastic decision they will succeed by default. Once someone has made a choice to try to resist ongoing cultural pressures they could perhaps succeed by the application of ongoing injunction by the rational part of their mind.
I still don’t particularly recommend moving to the outback and working in customer service. You will ‘succeed by default’ at doing something that isn’t all that desirable anyway. :)
I had a fairly similar response. I spent $900/mo. on rent when I was making $33k, and I am now spending $600/mo. while making $92k. Obviously whether or not someone spends a constant fraction of their income on housing is an individual decision, just as whether or not someone heads to Australia is.
I’m actually really shocked that you spent more than 95% of a $100k+ income. Even on a $24k student salary I managed to save around $6k/yr., and indulging in all the luxuries I care for I spend less than 35% of my current after-tax pay. I don’t feel like I’ve ever had to “micromanage” my finances or spend more than a few extra minutes a week to do this.
Even on a $24k student salary I managed to save around $6k/yr., and indulging in all the luxuries I care for I spend less than 35% of my current after-tax pay. I don’t feel like I’ve ever had to “micromanage” my finances or spend more than a few extra minutes a week to do this.
The trouble is that students (including graduate students) have ways to live extremely cheaply while maintaining reasonably high status. For people who are beyond that stage in life, either because they’re too old or because they have families, there are no such options.
As a general rule, unless you’re living in the middle of nowhere, housing costs are very high in all places nice enough to provide a respectable middle class environment for raising kids. Even if you don’t have kids, pursuing cheap living options beyond a certain age tends to signal low class and/or disreputability.
Your point is well taken. Not only do I not have children or dependents, and not only am I still somewhat in “grad student mode”, but I plan on eventually going back to school, so I don’t really intended to leave that mode before then.
In fact, I probably have an even more extreme form of this condition. I’ve never been too bothered too much by signaling low status, but I’ve actually been pained when I signal high status. My first (and only) car bothered me because while I bought it extremely cheaply, it was still in good shape. I feel like I ought not to be driving a vehicle that has working door handles, heating and A/C. My car certainly doesn’t signal high-status, but it doesn’t signal low-status as strongly as I’d like.
All of that said, the idea of spending 95% of a $100k salary does not sound instrumentally rational at all even if status is a highly-held value.
I object a bit to
housing costs are very high in all places nice enough to provide a respectable middle class environment for raising kids
My parents together usually made less than $20k/yr. while I was growing up (usually fluctuating around the poverty line). I don’t know how much they spent on housing (probably a large fraction of that), but I went to an expensive private high school (on scholarship, of course) and didn’t mind bringing home friends that came from $250k income families. I really don’t think my housing situation was bad even to their tastes, and it certainly isn’t somewhere I’d mind raising my kids.
So as not to forget considering different options, multiple locality can be a weird-funny-cheap option to save part of those 32% for a while.
Consider for instance hospitality exchange websites, where I have met people who lived for 100 days with 90 dollars while travelling with internet access...
I, for one, would much prefer a single really good argument to a bunch of pretty-good arguments all scattered about. I think your post would be much more persuasive if you removed the stuff that people object to and put in more solid reasoning.
These costs match my own cost of living when I was working full-time in the US as a highly-paid software engineer. So you could look at both columns as Louie2006 vs Louie2010 if you want to make it an apples-to-apples comparison.
Also, it’s an established fact that people spend a constant fraction of their income on housing no matter how much income they have in the US. Look at the reference for my cost data. Groups with wildly different incomes all the way from $25k/yr to $80k/yr all spend between 32-37% of their income on housing. So until I see research showing me otherwise, I stand by my use of fractional income costs of living for housing, transportation, and food budgets.
This simply indicates that as people get richer, they demand better housing. I live in Manhattan. I could get the same apartment if I go on to be an associate at a law firm making $165k a year or a public defender making $50k. However, if I’m doing the former, I’m probably going to spring for a nicer apartment. If my primary goal were saving money, as is implied in your job comparison, I could easily live in the PD’s apartment on an associate’s salary.
The fact that most people who can save big on housing choose not to is not applicable in your hypothetical; to the extent that it is, more expensive housing implies higher quality of life.
The numbers you quoted are averages for each ten-year demographic between 25 and 75, plus the tails. There’s no mention of variance, and I would expect someone employing rationality techniques to manage their finances to be an outlier.
Personal anecdote: My own finances as well as those of six of my friends fall well outside those bands, with housing costs around 13-23% of income. We’re all highly-paid software engineers between the ages of 25 and 30, and none of us have families.
Edit: I forgot to include utilities, so my friends in NYC actually edge the housing cost range up to 23% or so.
Bravo! Your housing budget is quite remarkable. I wasn’t able to do so well myself back when I was working full-time in the US as a software engineer. Do you track your finances with Quicken or some other software? Could you calculate your remaining income from 2010 after subtracting out taxes, rent, housing, transportation, and food?
It must be much higher than the 4% a typical American in your position has left. I’d be curious what the best case real world numbers are for people in your situation who are doing their best to optimize.
Also, I’m assuming you aren’t just taking money out of your housing budget and directing it into an expensive car right? If you don’t mind me asking, what are you directing your excess income towards?
Which was on response to:
You still seem to be missing the point. Statistical averages, even in percentage form, cannot be blindly projected across the entire income scale. Someone making $1M a year does not spend the same percentage on food as someone making $40k.
And what does it matter if he takes money out of his housing budget and directs it towards an expensive car? The point of disposable income is that you get to spend it on things you want. That includes nicer housing, restaurant meals, and fancy cars, the value of which is ignored in your calculations.
I track my finances directly in a CoffeeScript source code file and use a simple home-brewed software library to compute my net liquid assets and (when necessary) my estimated tax payments and projected tax liabilities. You’ve reminded me that I really should be using something like Quicken for finer-grained analysis, so I’ll look into that and post my numbers later this week (edit: one second thought, it doesn’t seem worth the extra friction).
My living costs followed a general upward trend that leveled off in late 2009, but my salary data is extremely messy for several reasons:
I had no grasp of what I was worth until 2007.
I had no interest in anything beyond emergency savings until mid 2009, and preferred to gamble on startup equity being worth something, reasoning that I was in my twenties and had plenty of time to settle down later.
I was too personally attached to the startup I worked at until early 2010.
It’s hard to imagine changing my past since it’d mean giving up several of my current friendships, but the decisions I made in reality were emphatically the wrong ones from a financial perspective: I worked at-cost for six years and left several hundred thousand dollars of potential salary on the table.
(At-cost was both the mode and the mean, but some months were significantly higher and some were unpaid.)
Here’s what I’ve realized in the last two years:
Startups are harder and more stressful than normal jobs, and as you get closer to founder-level the effect intensifies.
I can get a competitive salary even if I choose to work for a startup.
Savings can be used to fund my personal projects which:
are more fun than work;
might generate revenue;
could seed a startup of my own;
will hopefully improve the world.
Savings can also be used to vote for causes I think will improve the world.
There are risks: The labor market for software engineers may cool off, my costs may spike if I decide to start a family or have medical problems, and I may choose or be forced to retire.
I’m still determining the split between my own projects, other causes, and risk management, but my personal projects decisively dominate any significant increases in my personal consumption, which is why I don’t exhibit income elasticity for housing, why I use public transit instead of owning a car, and why I don’t eat out very frequently.
I think LukeStebbing has long since left LW, but I was just reading the comments on this old post and was struck by his first paragraph:
I’m sure it’s just coincidence, but it made me smile.
It’s an established fact that people who live in the US don’t suddenly decide to spend a year in Australia. Therefore, your plan fails, it just doesn’t happen.
Respectfully, I do not understand what your comment means. I didn’t think the author of this post thought that even 5% of the 300 million or so Americans would try to move to Australia any time time soon. But some much smaller fraction of Americans do, maybe even suddenly. The author of this post has offered facts to suggest that this could be rational for some people. For those people, how does this plan simply not happen?
Vladimir was being sarcastic, because Louie dismissed the possibility of optimizing one’s expenditures.
Louis is contrasting his personal experience with both his personal experience and demographic averages. What Louis did is not average; and there are other outliers who are not spending 32-37% of their income on housing. In fact, when he suggests moving to the outback he is simply rephrasing a suggestion of “spend less on housing”. Moving to the outback and getting a job as he describes is one way of doing that. Living under a bridge and showering at your gym every morning might be another.
I’m sure you didn’t mean it, but your comment strikes me as pretty harsh. Could you explain what you mean?
He is attempting to equate the micromanagement of optimal spending practices within a US city environment and culture with the big leap to go ahead and move to the Australian outback. Neither or these things tend to happen so he claims the right to say ‘you too’ on your ‘fail by default’ point.
Unfortunately this obscures or ignores the critical insight into human psychology that you allude to here with respect to setting up ‘succeed by default’ scenarios, particularly with respect to choosing critical culture and environmental factors.
If we are constructing advice for typical Americans, then this post presents good advice. But the target audience is stated to be the people who can follow counterintuitive pieces of reasoning, which is why insights into human psychology that oppose explicit reasoning shouldn’t be the issue (for the stated goal). From the post:
There nevertheless remains an enormous difference between the big, perhaps drastic but more importantly intrinsically decisive changes to environment and a commitment to try to resist cultural and environmental pressures as they are currently experienced. Both are big hurdles but their nature is very different. Once they have made the choice to make the drastic decision they will succeed by default. Once someone has made a choice to try to resist ongoing cultural pressures they could perhaps succeed by the application of ongoing injunction by the rational part of their mind.
I still don’t particularly recommend moving to the outback and working in customer service. You will ‘succeed by default’ at doing something that isn’t all that desirable anyway. :)
I had a fairly similar response. I spent $900/mo. on rent when I was making $33k, and I am now spending $600/mo. while making $92k. Obviously whether or not someone spends a constant fraction of their income on housing is an individual decision, just as whether or not someone heads to Australia is.
I’m actually really shocked that you spent more than 95% of a $100k+ income. Even on a $24k student salary I managed to save around $6k/yr., and indulging in all the luxuries I care for I spend less than 35% of my current after-tax pay. I don’t feel like I’ve ever had to “micromanage” my finances or spend more than a few extra minutes a week to do this.
datadataeverywhere:
The trouble is that students (including graduate students) have ways to live extremely cheaply while maintaining reasonably high status. For people who are beyond that stage in life, either because they’re too old or because they have families, there are no such options.
As a general rule, unless you’re living in the middle of nowhere, housing costs are very high in all places nice enough to provide a respectable middle class environment for raising kids. Even if you don’t have kids, pursuing cheap living options beyond a certain age tends to signal low class and/or disreputability.
Your point is well taken. Not only do I not have children or dependents, and not only am I still somewhat in “grad student mode”, but I plan on eventually going back to school, so I don’t really intended to leave that mode before then.
In fact, I probably have an even more extreme form of this condition. I’ve never been too bothered too much by signaling low status, but I’ve actually been pained when I signal high status. My first (and only) car bothered me because while I bought it extremely cheaply, it was still in good shape. I feel like I ought not to be driving a vehicle that has working door handles, heating and A/C. My car certainly doesn’t signal high-status, but it doesn’t signal low-status as strongly as I’d like.
All of that said, the idea of spending 95% of a $100k salary does not sound instrumentally rational at all even if status is a highly-held value.
I object a bit to
My parents together usually made less than $20k/yr. while I was growing up (usually fluctuating around the poverty line). I don’t know how much they spent on housing (probably a large fraction of that), but I went to an expensive private high school (on scholarship, of course) and didn’t mind bringing home friends that came from $250k income families. I really don’t think my housing situation was bad even to their tastes, and it certainly isn’t somewhere I’d mind raising my kids.
So as not to forget considering different options, multiple locality can be a weird-funny-cheap option to save part of those 32% for a while.
Consider for instance hospitality exchange websites, where I have met people who lived for 100 days with 90 dollars while travelling with internet access...
But most importantly, working remotely has been one of Tim Ferriss most interesting suggestions, and I really want to know if anyone here has actually tried to do what he did online. So I posted this in Discussion: http://lesswrong.com/r/discussion/lw/448/on_the_effectiveness_of_ferriss/
I, for one, would much prefer a single really good argument to a bunch of pretty-good arguments all scattered about. I think your post would be much more persuasive if you removed the stuff that people object to and put in more solid reasoning.