Cliffs Notes: Triple Value

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This may be a little bit Meta, but tonight’s blog post will be a blog post about another blogger’s blog post.

(There are some blog posts that are so good, they demand separate blog posts about them.)

The first such blog post that comes to mind for me is Mr. Money Mustache’s life altering post The Shockingly Simple Math… which I’ve referenced several times before on this blog.

But this past week I made references to an excellent article by the Mad Fientist entitled The Triple Value Of Income.

Before you read another word of mine, I urge you to click on the link above and read this article in it’s entirely. Then come back. There will be more…

emergency broadcast system

There is nothing to see here…proceed to Mad Fientist

…. Welcome back. Wasn’t that great?

So to sum it all up in bullet points (italicized bullet points represent additional points that I am making.)

  • Each dollar earned and spent today achieves only $0.80 of value because of tax loss.
  • I would actually express this somewhat differently: each dollar spent today actually costed you a $1.25 of wages.
  • In my particular case, each dollar spent today actually costs closer to two dollars due to my higher marginal tax rate, FICA taxes, and state income tax.
  • A dollar not spent and invested in a taxable account for 10 years yields $1.45 of present day value assuming a real 7% return on the stock market.
  • Note that this is assuming only 10 years of investment not 30 as is the case below with retirement accounts.  If invested over 30 years the new value would be $5.33.
  • A dollar not spent now, and invested in a tax advantaged retirement account (401(k), 403B, IRA… Etc.) for 30 years will then be worth $6.70, assuming a 12% marginal income tax bracket in retirement.
  • A dollar not spent now, matched dollar for dollar by an employer, and invested for 30 years will be worth $13.39 in retirement.
  • If that $13.39 is not pulled out in retirement and is instead invested in a bond at a yield of 3.5%, then you will make that original $.80 of value (had the the dollar been spent immediately,) every two years without losing any of your principal!
  • That last point is an excellent example of the compounding nature of stock returns; small changes over long periods of time yield dramatic results.

So there you have it, a very compelling argument to maximize your savings!

If you’d like to figure out your effective income based on different savings strategies, the Mad Fientist has a nifty calculator for you to play around with. Check it out! You may find it very motivating.

Here are some additional philosophical reflections on this article.

This discussion very much goes to the question of “what is wealth?” I think the common conception in our culture is that wealth means having lots of money and spending it on nice things.

This article kind of flips that conception on its ear.

When money is looked at from the Mad fientist’s perspective, Spending money now becomes the opposite of wealthy behavior. True wealth is a function of saving and discipline.

His calculator is actually very conservative. For higher income earners like myself the marginal tax rate is much higher, and so the actual benefit of tax exempt savings is much much greater.

This article elegantly drives home the power of tax-deferred savings. We should all be doing everything in our power to maximize our participation in tax-deferred savings vehicles such as 401(k)s, IRAs, backdoor Roth IRAs, and health savings accounts. These are all powerful wealth multipliers.

The counterargument to all of this, is the point that his mother originally made. Sometimes it’s better just to spend money and not think about it so much.

But I would add an addendum to his mothers counterargument. Spending money only really makes sense if not spending it costs you (or others around you)  happiness. Spending mindlessly is pretty much always a waste in my book.

What are your thoughts?  As always, comments are welcome.

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5 Responses to “Cliffs Notes: Triple Value”

  1. Robert February 9, 2014 at 5:06 am #

    Gotta weigh in on this one! The concept of thinking about dollars that must be earned in order to spend a dollar is a powerful one, first introduced to me by Dominguez and Robbins in their classic book, “Your Money or Your Life!”. I think the Mad fientist did a great job of laying things out, but I might add a couple points (besides yours about marginal tax rates).

    First, he mixed different time periods: 30 years on the IRA and only 10 years on the investment. This makes his calculations too conservative if you are truly thinking about a retirement 30 years out. An apples and apples analysis would have done the investment portion for 30 years also. If that were done, the value of a deferred dollar of spending would be that much higher. In fact, each $0.80 of investment would become as much as $5.33 after 30 years of 7% real growth and assuming the same 15% capital gains tax rate. This is without using additional tax sheltering strategies one could use over the course of 30 years (selling at loss to shelter current income; deferring gains for long term capital gains). $5.33 instead of the Mad Fientist’s $1.45 means that the $48,650 he invested grows to $259,305 instead of $70,543! Thus, the $100,000 grows to $452,425 instead of $263,663.

    But there is another angle on spending I’d like to highlight. Most people who would spend $100,000/yr instead of saving a lot of it would be buying cars, boats, bigger houses, fancy appliances, etc. Not only are these items expensive up-front, but they have high carrying costs! Homes have maintenance, utilities, etc., that generally increase with size and complexity. More expensive cars usually have more expensive parts and maintenance and lower fuel efficiency. Boats and many other expensive toys are well known black holes for cash. As you buy more of these items each year, your carrying costs grow. Thus, if you spend all your after-tax income of $80,000, you are not only depriving yourself of future compounded growth, you are compounding spending! Each year the percentage of that $80,000 that you are “free” to spend decreases, since more and more of it has to go to fixed carrying costs just to maintain what you already bought. The accompanying sense of a reduced freedom to spend drives you to feel you need to earn even more (with higher marginal rates) or borrow (which leads to even worse problems than spending all you have). So, learning to live on a fraction of your income has many, many advantages!

  2. Miles Dividend M.D. February 9, 2014 at 8:55 am #


    Great points. Although I did notice the varying time periods in his taxable vs Dax deferred calculations, I should’ve mentioned it. I will add another bullet point to the post.

    But your point about carrying costs is a great one that I hadn’t considered. This adds a fundamental and Non behavioral layer to the idea of lifestyle inflation that I discussed in “blowing up.”

    This is worthy of further thought in a future post. Thanks!


  3. Robert February 21, 2014 at 9:05 am #

    Good article summarizing issues with ROTH IRAs published today.

  4. The White Coat Investor March 16, 2014 at 1:51 pm #

    The problem with early retirement discussions (like this one) is that they make the assumption that you don’t actually enjoy your job and that there is something you would much rather be doing with your time than working at your job. I agree that if you are not spending your time doing something you love that you can escape from that burden very quickly by maintaining a ridiculously high savings rate, especially if you have a high income (like a cardiologist). But that doesn’t seem like the best way to maximize your happiness to me. Consider a doc:

    He spends 4 years busting his butt to get into medical school. He then spends 4 more years studying dawn until dusk in medical school, followed by 3-6 years of 80+ hour work weeks at minimum wage. He then decides he hates his job and wants to free himself from it as soon as possible. Despite maxing out all retirement accounts, he’s still paying 20% of his income in taxes and living on 30% of it (his family won’t tolerate any less spending than that) and thus saves 50% of his income. Per MMM’s chart, he will have to work 17 years in order to retire. So, that means he spent 11-14 years preparing for a career he apparently hates and another 17 years working in it, for a total of ~30 years in the prime of his life.

    It would seem to me that he would be much better off (happier) finding a career that he actually enjoys. I’m not convinced the Holy Grail is early retirement. I think it is finding a job you would be willing to do for free that pays you handsomely (or at least reasonably.) That job might not be out there for some people, but it seems worth a lot of time and effort looking for it. Because if you can be happy working until 60 or 70 or longer, then you can afford to either spend a lot more money (or work fewer hours) as you go along, which may also bring you more happiness than scrimping and saving every last penny.

    I balanced all of these figures out in my mind and ended up with a savings rate in the 20-30% range. It will still leave me the ability to retire quite early if I start hating my job, while allowing me to work a relatively easy schedule now and spend money on just about anything I want, both of which increase my current happiness. Moderation in all things.

    • Miles Dividend M.D. March 19, 2014 at 4:46 pm #


      This is a great comment which I just found in my spam pile. Sorry for the delayin approving it.

      I really don’t disagree with any of it. Having a job that you love is a wonderful thing and is incredibly valuable.

      A couple of points:

      1. Your 20-30% range may actually be the same as my 50-60% savings rate depending on how you calculate it. For one thing I think many high earning MD’s effective tax rate often can be higher than 20% if you take into account FICA, taxable capital gains/dividends, etc. Also I count the principle paid on my house in my savings rate (since the home will be paid off when I retire) and I calculate the savings rate based on my take home pay, not gross. Just maxing out 2 retirement accounts (ie 403B/457’s,) an HSA and 2 backdoor Roths should get you pretty close to 50% if you include your principle on a 15 year mortgage.

      2. Reaching financial independence does not require you to stop working. It just requires that you stop complaining about working because at that point the choice becomes entirely yours. You are doing it solely because it gives you meaning and for no other reason. Depending on your psychology, this can be happiness inducing I think.

      3. In my mind, any savings ratio works as long as it is in keeping with the values of the saver. In other words, as long as the things and experiences that one buys are worth more than the years of financial independence one gives up with their purchase. This to me is the central insight of the early retirement movement: purchasing things is , in essence, spending freedom. Sounds hokey, but I think it’s profound.

      In any case, thank you for your wonderful blog. I have learned a lot from it, and continue to do so with each new post. I have your book on order as well.


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