By Dr. Matt Morgan, Guest Writer
I’ve noticed that a lot of discussion around the pathway to financial independence and living the “good life” revolves around two powerful, but distinct schools of thought. This division is best highlighted in two very popular financial internet personalities: Pete Adeney and Ramit Sethi. If they were to meet in person, it would probably be like mixing matter and antimatter. Both are highly opinionated, alpha personalities who don’t suffer fools gladly. However, their financial advice can seem like oil and water. Let’s take a look at each of their financial approaches to see if it can reveal something about the way you may want to navigate your way to wealth.
Financial Independence via Pete Adeney of Mr. Money Mustache
Pete Adeney is the founder of the popular blog MrMoneyMustache.com (MMM). He is currently a 44-year-old who “retired” from software engineering at the ripe old age of 30. His financial philosophy is pretty simple: reduce waste, reject consumerism, pare down and optimize your life to live simply, save as much as you can (>60%), and build investment wealth so you can escape the rat race in 10-15 years. Some of his popular blog posts have titles like, “Living Beautifully on $25-$27K Per Year,” and the “The Shockingly Simple Math Behind Early Retirement.”
Financial Independence via Ramit Sethi of I Will Teach You To Be Rich
Ramit Sethi is the founder of the popular blog IWillTeachYouToBeRich.com. He is a 36-year-old with a penchant for creating online businesses. He is an entrepreneur and would-be empire builder. His financial philosophy is to focus on the “big wins” rather than the innumerable small purchases. He admonishes you to create more capacity and expand the pie so that you can “live rich” now. He believes frugality is futile and limited because after all, there is only so much one can save, but earning potential is unlimited. Some of his popular posts include titles such as, “The Psychology of Cutting Back on Lattes,” and “Is frugality about saving money or making you feel less guilty?”
Who Is Right?
So, given the stark differences in their approaches, who is right? Is it better to build your financial reserves ten bucks at a time like bricks in your retirement castle? Is a penny saved a penny earned (or two pennies when you consider taxes)? Or should you transform your yearnings for more wealth into productive energy, build multiple streams of income, and seek to expand the pie? Pete would say, “Not wanting it is as good as having it.” Ramit would say, “If you want it, you should have it.” Pete would say, “Frugality is fun.” Ramit would say, “Frugality is painful and guilt-inducing.”
The Wealth Equation
So, regular readers of this blog know that building wealth is not rocket science. Wealth building actually boils down to a very simple math equation:
Wealth Index = Earning / Spending.
That’s it. And notice that it’s a ratio, so the numbers don’t matter so much as their relative size to each other. Yes, I do recognize this breaks down at very low-income levels, but this is the basic formula from which the rest is derived.
Given this simple formula, we can quickly see the three approaches to increasing wealth:
- Increase the numerator
- Decrease the denominator
- Increase the numerator and decrease the denominator
So, it’s not really a matter of who is right. It’s a false dilemma. Pete is focused on controlling and optimizing the denominator (minimize expenses and eliminate waste), while Ramit is focused on controlling and optimizing the numerator (new streams of income, pay raises, and other big wins). They both have persuasive and fairly dogmatic arguments for why they are right, but of course, they are both right.
Values
Whether you’re more of a ‘numerator’ person or a ‘denominator’ person is really a values question, not a matter of right or wrong. In fact, this type of dilemma is a part of many philosophical conundrums: striving for more vs contentment with what you have, building new vs optimizing current, long working career vs FIRE, and the political debates of growing the economy vs cutting spending.
Personality
Reader comments on their blogs are indicative of how these distinct approaches resonate with different personalities:
Here’s a comment from a reader on iwillteachyoutoberich.com
“I’m quickly tiring of the New Frugality. I think it is all code for “Americans, adjust your expectations and learn to be happy with less”. I want my America back – the Land of Great Expectations and Lots of Chutzpah to Make it Happen.”
Here’s a comment from a reader on mrmoneymustache.com
“I really like MMM’s approach because all I had to do was just analyze what I’m already doing. I didn’t have to start a business, negotiate my salary, do freelance work, or anything like that. I just had to take a step back, and make my current life more efficient.”
You can almost predict the personality types (Myers-Briggs anyone?) from the different responses. Perhaps a ‘numerator’ is more likely a Commander, and a ‘denominator’ is more likely a Logistician. Are you a ‘live for today’ or ‘a save for tomorrow’ kind of person?
Career Frontloading vs Consumption Smoothing
Another way to think of it is in terms of frontloading vs smoothing. Pete is a front loader. He worked his tail off as an engineer for 10 years, saved 75% of his income, and “retired” at age 30 to do other things (including writing a very successful blog that earns a nice return–cue the internet retirement police). Pete’s approach echoes Dave Ramsey about how to live like no one else (i.e. scrimp and save) today so that one day you can live like no one else (i.e. be your own boss without the need to trade your time for money).
Conversely, Ramit has the heart of an entrepreneur. I don’t think he would ever claim to be retired. His approach emphasizes smoothing out his consumption so he can have the “good life” today and into the future. His advice centers on how to get out and hustle to increase your income, so you can “spend lavishly” on the things you love today–don’t postpone your desires until some unknown future date.
Economists have even come up with a boring sounding term for this allocation between today and tomorrow, intertemporal consumption, which is the attempt to explain people's preferences in relation to consumption and saving over the course of their lives.
Implications of the Wealth Equation on Financial Independence
So what does this mean for you? How might you incorporate these different approaches in your life?
First off, readers of this blog can be grateful that this is an academic discussion. As a site for high-income professionals, most WCI readers are sitting on a relatively large numerator. For you, wealth should not be a question of If, but How and When.
Success as a Denominator
So, if you prefer to work to live, not live to work, if you consider your paid profession more of a job than a mission, if you think hassles and regulation of medicine is taking the fun out of it, if you’d like to try a different career but worry that it doesn’t pay enough, if you tilt toward minimalist, if you don’t mind budgets (maybe even secretly like them), if you see more logic in optimizing rather than multiplying, and if you’d rather not start a side hustle or negotiate a bigger salary, then you are probably more of a ‘denominator’ type.
In your case, start by thinking about “how much is enough” and work backward. How much do you need per year to live an adequate lifestyle? Multiply this number by 25x and then work and save like the dickens to get to this goal (front load). When you get there (warning: this can be fuzzy), you’ll have the freedom to cut back to part-time or possibly move on to something more interesting/valuable to you.
‘Denominators’ will especially enjoy books like The Millionaire Next Door and Your Money or Your Life. These books reveal how powerful saving and economizing can be. There is a certain elegance to keeping your life simple, unencumbered, and dare I say, frugal. It’s probably good for the planet too. The PhysicianOnFire.com blog will resonate with you.
Possible risks of optimizing for the denominator and frontloading your earning are that you may encounter unforeseen circumstances and not live to enjoy the fruits. You could spend your most youthful/healthful time being frugal and then discover that you're not able to enjoy your wealth as much when you’re older (heli-skiing anyone?). You could lose your sense of purpose when you “retire” and feel unhappy despite being financially independent. Furthermore, you’re initial calculations of “how much is enough” may turn out to be too low and constraining as you mature and possibly add family considerations.
Success as a Numerator
If instead, you love your paid work and/or see many opportunities to produce value for others, if you find the idea of multiple streams of income intriguing and motivating, if you would rather earn more than save more, if you enjoy the luxuries of life (big house, fancy cars, wake boats and home renovations (wink), vacation cabins, expensive travel, and consumer spending) then you, my friend, likely tilt toward a ‘numerator.’
In your case, start with what you want and work toward it. Target a high paying specialty in a low cost of living area. Be smart about your expenditures, but focus on “the big rocks” and don’t sweat the small stuff. Build your practice, start a side-hustle, and consider real-estate and other alternative investments. Loosen the purse strings (assuming you’re out of debt and doing all the right things). The sky's the limit because your earning potential is high, and your time horizon is long.
Numerators may enjoy classics like Think and Grow Rich, and The Magic of Thinking Big. And if you haven’t already, you’ll want to check out a fellow numerator, PassiveIncomeMD.com, who will expand your thinking on the many options of enlarging the income pie.
Potential risks to the ‘numerator’ approach are that you may never have “enough.” Yes, watch out for that insidious thing called hedonic adaptation. You may literally ‘spend’ your life seeking more money rather than enjoying time with people who matter most to you and doing things that are most meaningful. You may change your mind about how much you love your career after 10-15 years (the ‘hassle factors’ can burn you out). You may also overestimate your earning potential (numerator) and underestimate your consumption (denominator) and its effect on you future goals.
Creating Great Wealth
Ultimately, life is about deciding how to allocate time and money for what matters most to us. As is said frequently on this site, there are many roads to Dublin. Some folks will want to create great wealth by economizing, saving half or more, minimizing waste, and possibly “retire” early from the requirement of paid work. Others will want to create great wealth by thinking big, working extra hours, and maximizing their income and splurging on some luxuries along the way. And then a unique few, like WCI himself, will do both with impressive results. It’s not about which method is right, it’s about values and priorities. Wealth Index = Earning / Spending. Whether you focus on increasing the numerator or decreasing the denominator or both, you can and will achieve financial success.
What do you think? On your road to financial independence are you more of a ‘numerator’ or a ‘denominator’ or somewhere in-between? Comment below!
[Founder's Note: Matt Morgan, MD is a practicing radiologist at the University of Utah with research interests in machine learning and medical decision support. He splits his time with Elsevier, Inc where he helps build medical software for physicians. He is also the founder of the TheFirstHabit.com, a popular and thought-provoking blog that explores how small daily habits make a big difference in creating health, wealth, and wisdom. He presents at national conferences on personal productivity and mindful living. Matt, his incredible wife, and his six kids have had a front row seat to the emergence of The White Coat Investor and he has a valid claim to being the inspiration behind WCICon18 where he served on the blogger panel. We have no financial relationship other than piano lessons.]
I am all about both. Earn a lot, save a lot. Live a little now so that I can live a little later. I am not going to delay everything until the day I make it because I am not guaranteed to get there, but I also save a lot now knowing my future self will thank me when I get there.
For me, it’s all about contentment and determine what actually makes me happy. Not what I think makes me happy, but what actually does. I splurge a little there, even now, and the rest can wait.
Balancing the numerator versus the denominator and the now versus the future self is tough, but it can be done.
Thanks for the thoughtful post on pointing out the fallacy that you have to choose. I choose both.
TPP
So, here’s a question for anyone: If you were in a real big hurry to get to $3M in invested assets (5-10 years), which would you focus on most?
To answer this question, I would absolutely focus on the numerator and increase my earnings. But earning $3M in a hurry may not necessarily be my goal.
Agree with Dr. McFrugal above. Though what I am doing is focusing on both. And I’d even throw in a third number…. That going to debt.
I have been growing my income, living frugally, and pounding my debt in the first two years since finishing training. This combination has worked well. After the loans are gone, we will live a little less frugally (buy a house). Paying off the loans early is what is going to help is get to 2.5-3 million quickly
It depends on lots of things, including your current income, level of debt, demand for your specialty, and willingness to move to another geographic location. If you have a relatively lower income, but have opportunities to increase that by 50% by moving to the Midwest, that is one possible way to increase the numerator. If you have a decent income, yet have 2 car loans, credit card/ student debt, etc. then demolishing those in short order will allow a much greater savings rate within that 5-10 year timeframe.
I think it is unusual to have a side gig that will reliably boost a doctor income significantly within 5 years. Lucrative side gigs tend to take years to develop (mostly).
5 years? Numerator. 20 years? Denominator.
Ha! Well, you and I are examples of both approaches . . . you’ve accomplished this in short order with a powerful numerator (i.e. an **insane** amount of hard work and business savvy). My numerator is pretty well fixed as an academic physician, so I’m mostly working the denominator. The first $1M took a little over 7 years, so I’m hoping to be at $2.5-$3.0M by 15 years (they say the first million is the hardest), however with the low expected market returns in the next decade, I’m not holding my breath.
Great write up on two opposing thoughts to approaching wealth.
The best part is that it is not an all in choice. I am lucky to employ a combination of both philosophies. You are correct that being a physician already puts you ahead of the game in the numerator component. On top of that I have added to the numerator with passive income streams (real estate, dividends from stocks) that has helped accelerate my path to wealth.
The denominator component has been another key to my success as I (by accident) live in in a very low cost of living area and truly apply the benefits of geoarbitrage (no state income, affordable property, etc).
If I was forced to choose between the two I would lean towards the philosophy of Ramit. I do not feel that being an extreme minamilist like MMM would suit my lifestyle. It’s great that one could live off of less than $30k/yr but I didn’t sacrifice my 20s to become a physician so I could forgo all luxuries (I enjoy food too much and when I travel I really like to go high end).
Agree, not too many high income professionals will adopt the extremes of MMM, however there is a relative approach of economizing (PoF for example) that will allow someone to reach FI much sooner than someone who ignores the denominator. It’s really about figuring out if the purchases are in the “noise” of the equation.
Nicely said Matt. Very succinctly put together and an accurate depiction of both thought leaders. I am with you, niether path is right or wrong. Personally I am a combo of both but I assume most people are. Just focus on the big stuff like home or car costs, improving your salary at work or through other means, and finding a way to enjoy your job and you shod be set. The $5 latte matter less.
Great comparison. I’m a little of both, but probably would like to be more numerator. However, life commitments, relatively longish hours at work, and fatigue does limit going for the numerator. That’s where having a denominator to fall back on continues to build that wealth index!
This is probably one of the better pieces I have read comparing multiple philosophies and you hit the nail on the head when you stated this is “a false dilemma”. Most people (and bloggers / media / etc) always try to promote one idea or strategy to success.
Even for high income professionals such as your readers, maximizing the numerator while keeping the denominator in check is still something we need to watch. All that changes for 90+ percent of us, is the mix of focus on each. And as you also stated “its about how to allocate time and money”.
IT”S BOTH !!!
Well done, Dr. Morgan.
I love the way you think and write (maybe because it is more like my own – big picture and with applied philosophy). I am a “choice 3” person.
Keeping spending low is important: I grew up dirt-poor. I knew people that would spend half a day to find a $1 item instead of paying $1.50 at the first opportunity. They can make a nickel stretch forever and can live on almost nothing. They leverage frugality and social groups to keep costs low. I too live by this New England mentality of “make do, wear it out, make it do, or do without.” You can’t outspend your problems. There are actors making millions who still go bankrupt to illustrate that point. The Millionaire Next Door documented the benefits of modest living to grow wealth well. I know male physicians whose wives spend the money faster than they can make it and they never get ahead. Also, there is more strength in cost-cutting because of the speed of change and the tax benefit. As we make more, we pay more through progressive taxation.
On the other hand, boosting earnings is important. Many of the people I grew up with are still impoverished since they didn’t grow their earnings. Poverty can trap you and limit your options. It could even cut your life short. Both of the authors of Your Money or Your Life battled cancer. Vicki had to sell assets to cover her medical expenses and Joe passed away young. I don’t know if having access to earlier or better medical care would have helped him or not. I know some poorer relatives of mine who delayed care because of cost and ended up having more problems later. Inflation is a real thing. Lifestyle inflation is also unavoidable. Smart people underestimate both (like Joe Dominguez or Ben Franklin). As I wrote about in a post this week, Franklin thought he was “set for life” and retired at age 42, but found himself having to severely cut expenses at age 60.
So yes, do both. I did and it has worked for me. Many of the ‘cut expenses’ crowd keep growing earnings despite themselves. That is true for MMM (who has an income >$400K) and Dave Ramsey (who has tens of millions and a growing media and real estate empire). Grant Cardone is also an inspiring source for “grow your income” inspiration in his books, 10X and Be Obsessed or Be Average.
Keep up the great work. I look forward to future posts. But for now, I have to go do a Fitness Blenders workout. I first learned about those from a post I read from one of my favorite bloggers: https://www.thefirsthabit.com/high-intensity-interval-training-a-fountain-of-youth/
Ha, thanks WealthyDoc. Did my HIIT this morning too. Everyday, everyday, everyday (well weekdays anyway). Compound interest for your health. It’s seems invisible, but is very real.
I really like this formulation. I gravitate a bit more to the denominator end and my wife a numerator. It is challenging to reconcile the two but having a common language and articles like this make it easier to understand the others perspective.
I see the great value in both points of view but worry that the numerator end has the bigger risk seeing as hedonic adaptation is so powerful. For most of us a balance is likely the best approach. Get a handle on spending, appreciate what enough is but let that enough be a bit more fancy than most 🙂
Thanks again!
My husband and I are both physicians, save a good chunk of our money, don’t have any kids and even though we don’t need any luxuries to be happy, we do allow ourselves to spend money on things that make us happy which to some people may seem ‘luxurious’ (crossfit memberships, weekend meals out, travel). I think there can be a healthy balance.
Moderation is good. The healthy balance you describe is the “consumption smoothing” I mentioned. This works great for folks who are not looking to move on to other options. However, if there is someone who really wants to hit FI sooner rather than later, then digging into the denominator can have amazing effects.
Excellent contrast between two different but potentially complementary philosophies.
I used to focus more on the numerator, working extra weekends and taking locums gigs on some weeks off to build up that money pile. All the while, we were naturally keeping the denominator in check based on the way we were raised and the values that were instilled in us to avoid wasting money.
Once I figured out that I didn’t need such a huge numerator given our relatively low denominator, I became comfortable with working less and perhaps not at all.
One thing I’d like to point out is that everyone can work on the denominator with a high likelihood of success. Everyone can also work on the numerator, but our economy will not support everyone succeeding. All physicians have the opportunity to make good money, but when you’re talking to a general population, as Mr. Sethi is, they can’t all start making $200,000 or more. Any individual can, but not all of them.
Cheers!
-PoF
Yes, physicians are in a good spot with lots of options given the relatively higher salaries. For lower incomes this does become even more of a decision of where to focus the effort. For the folks who cannot seem to find a way to expand the pie (not as proactive, energetic, or entrepreneurial), the denominator focus is very empowering since you have so much control over it. I think this may be why the themes of MMM are resonating with lots of people.
Not everyone has the inherent capabilities to make for a successful entrepreneur, and some people have the ability but choose not to. The Ramit Sethi method only applies to a very small portion of the world population.
As doctors, we have plenty of options. I personally lean toward the Mr Money Mustache approach, but due to having a relatively high, stable income, it’s easy to save & invest half of my gross earnings and still do anything I want to do and not worry about where each and every dollar is spent. Tougher for someone with a normal middle class job. Many in our profession branch out into other business ventures, and that’s awesome, but it’s not for me. One high paying job with good hours and a nice lifestyle is enough.
I think the key is balance between these two. If you are overly frugal you will miss out on many of life’s opportunities (travel). However, if you overdo it you’ll be one of those people who’s in debt up to their eyeballs. One other thing to consider (especially with experience) is age. I remember being in my 20s and living a train ride away from NYC and traveling on a whim (when you had your vacations from residency). I spent many nights out and about. From a “frugality” standpoint this would be wasteful. However, now in my 40s I realize that despite having greater means logistically you can’t live like you did back then.
A most excellent instant classic post on the dynamic of developmental finance distilled into a simple, but powerful mathmatical equation/ratio that evolves with our financial growth, development, and values while remaining flexible to our financial individualities! Bravo FirstHabit. I enjoyed meeting you at The inaugural WCInvestor Conference. Your distilation of your thoughts on “excercising our livers” with rythmic periods of ketogenic evolutionary starvation were equally interesting. Keep the “big thoughts” coming.
Best,
Bill
Hi Matt. Great post! I’m definitely a little bit of both. Even though my frugal name suggests I should be in the denominator camp, I am also team numerator and try to grow my income. The beauty is that you can pick and choose how you want to live. For instance, I save money (and decrease the denominator) by saving on food and not buying a lot of material things. BUT I also live relatively lavishly by living in a nice home and live for the now by spending on luxurious vacations and other experiences… and my ability to live this way is a result of increasing my earnings (the numerator) as a physician who invests in a lot of different things.
The main decision is what do you want your ‘velocity’ to wealth to be. The higher the index number the higher your wealth velocity. WCI and PoF have suggested “living on half” which is really another way of saying that you may want to consider getting your wealth index to around 2 (if you subtract taxes from the numerator). To make it simpler, if you don’t subtract taxes, it would equal something more like 2.5 to 3. The point is that you want to have a high wealth velocity, especially in the early years. This is what “live like a resident” really means, right? Strive for a high numerator and minimize the denominator for 3-5 years out of residency. After that, you may want to do a “slow burn” of an index 1.5 or continue to push ‘petal to the metal’ and keep the index at 2.5-3 or above.
I think you are skipping a salient point, Pete and Ramit have identical philosophies. They are basically the same person. Here it is : 1 craft an attractive lifestyle and create a brand, 2 market it and build a tribe, 3 earn six to seven figures annually from your marketing.
I’m not saying they are insincere, far from it, I admire them both and they have both done a lot to improve the lives of their audiences. But don’t doubt for a second they are both extremely good businessmen.
Well, it goes without saying for Ramit. The only question is Pete. I’ll leave that for others to judge, but at least from what I can tell, his website is significantly under-monetized. But yes, there is almost always a business in the background. Very few people just “preach for free” if they can make something at it at the same time.
Great article.
As with anything which path you take — or maybe you are in the middle, is a matter of what lifestyle you want to live.
What is missed is that it is easier (and safer) for most to focus on the numerator, if you are working for corporate America (or even yourself) where with a job you are usually “forced” into some form of savings, either in the area of Social Security, or pension contributions. If you truly retire at 30 these forced savings go away and you are on your own to make 100% of your retirement work to whatever age you survive, and by the way don’t forget about inflation.
I think for anyone who has studied MMM in depth he really did not retire at 30, he just quit one job and started up another for which he is his own boss. It’s not really retirement by any stretch of the definition.
Finally, let’s not forget what $30k of expenses at age 30 will probably need to be by age 95 with a mere 3% inflation. I think it’s somewhere around $205,000. Sometimes that is something that those doing long range retirement projections fail to take into account.
As has been already stated, I think for most it is a matter of trying to do both.
Your voice joins the chorus of those pointing out that “retirement” (as some bloggers define it) does not strictly mean zero added income for the remainder of your life. I see this as a minor point. Financial independence is more about having freedom and choice in how you spend your time. Golf and pina coladas may get old pretty fast. As a talented individual, there will be many ways that your interests and talents can combine with market needs, which may produce more income to “ease” the pressure on your portfolio. Financial Independence is like putting a floor under you, but you will likely want to continue to contribute to society, and some of these may actually pay you money for your service. Teaching and writing are good examples of this.
Regarding inflation, there are risks if you adhere to any formula too strictly. If you take a look at the 4% rule, you will find that it does attempt to account for inflation. The research premise is that **even during untenable markets** (including Great Depression and recent recession), no historical case existed in which a 4 percent annual withdrawal exhausted a retirement portfolio in less than 33 years. It’s not a law of nature, just something to put in your pipe to smoke and do with what seems right for you.
Your voice joins the chorus of those pointing out that “retirement” (as some bloggers define it) does not strictly mean zero added income for the remainder of your life. I see this as a minor point. Financial independence is more about having freedom and choice in how you spend your time. Golf and pina coladas may get old pretty fast. As a talented individual, there will be many ways that your interests and talents can combine with market needs, which may produce more income to “ease” the pressure on your portfolio. Financial Independence is like putting a floor under you, but you will likely want to continue to contribute to society, and some of these may actually pay you money for your service. Teaching and writing are good examples of this.
Regarding inflation, there are risks if you adhere to any formula too strictly. If you take a look at the 4% rule, you will find that it does attempt to account for inflation. The research premise is that **even during untenable markets** (including Great Depression and recent recession), no historical case existed in which a 4 percent annual withdrawal exhausted a retirement portfolio in less than 33 years. It’s not a rule of nature, just something to put in your pipe to smoke and do with what seems right for you.
Nice post. Growing up poor in Sub-Saharan Africa helps put this in great perspective for me. Even living like MMM is considered rich back home. And like Yanni once said, “most of the simple pleasures of life are free”. But as physicians with relatively high income compared to the general population, even if you don’t have any other stream of income, we are in the Numerator (including the lowest paid physicians like me). But like Shakespeare once said…”Moderation in all things”. I try to find a balance in the middle. You will never go wrong being moderate.