The first part of this post is for humor’s sake. If offended, please note that I am just gently poking fun at one of our current excuses for taking offense. Just go with it until I get to the bigger point.
If five men can build five ships in five days, how long does it take one man to build one ship?
The conventional answer is that it takes one man five days to build one ship. Either five men are working together to get a ship built each day, complete the ship and start on the next one on day two and so on… or each man works on one ship by themselves and all complete their ships at the end of day five.
Some gentle readers might protest that I used the terms ‘men’ and ‘man’ in the question, preferring that I used women, children, martians, or most correctly shipbuilders – as in how long does it take to one shipbuilder to build one ship.
Must be gender neutral.
Point taken. Let’s see if I can do better.
Next question:
If one man can have one baby in nine months, how long will it take nine men to have one baby?
I think I messed up again!
The second question correctly asserts that nine women cannot have a baby in one month – I first learned this analogy in The Mythical Man Month by Fred Brooks.
The point of this post is that extrapolation can be a dangerous thing. But only if taken to extremes (laughs or groans, either are OK).
Now we get to the meat of this post.
I have seen a number of postings that go something like this: Joe laments that he cannot save any money. But we noticed that Joe spends $10 a day on Java at the local coffee shop, and that is $3650 that Joe could have invested. If invested for a 7% annual return, that $10/day would yield $4 billion dollars in 30 years (or whatever number they really put here). The actual value 30 years later for this one mythical year’s worth of savings invested and doubling every 10 years, is $29,200. So, Joe, is that cup of Java (cup of Joe?) you are enjoying today really worth $29,200 to you?
I get the point, we make choices, and choosing to increase our savings rate will increase our wealth due to the magic of compounding. Many people think they have no money to invest. The stoic frugalist sees this purchase at the local coffee shop as a huge missed opportunity. It’s also ‘proof’ that Joe the lamenter has no intention of becoming wealthy, or is missing many opportunities and if we just point them out, then voila!, our lamenter will be rich and happy (but much more tired for lack of caffeine).
But does anyone really spend $10 a day every day, 365 days a year on anything (except cigarette smokers and drug addicts of course). I doubt it.
Here is another example from a facebook site called I love travel and adventure:
This has been bugging me, probably because I feel guilty about my discretionary spending habits. I do spend money on some ‘extra’ things. Maybe often. But not every day.
The example that is often used is packing lunch vs buying lunch. So let’s take a look at a real-life example: my lunchtime spending.
For the first 15 years or so at my current company, I lived 1-2 kilometers from work. (Just went metric, deal with it). I came home for lunch most of the time and ate leftovers or a peanut butter sandwich (no jelly) or something like that.
I used the time at home to get non-work phone calls done (with some privacy) and chillax from any work stress for an hour.
First point: whatever I ate, it was not free – maybe low cost, but not free. So the amount I spend buying lunch is only a bad deal financially if it costs significantly more than what I pay for the lunch I would otherwise eat at home.
About five years ago the company moved, tripling my commute to 3.4 miles (back to the English system).
It is just a tad too far to rush home, make lunch, eat lunch, and return to work. It no longer made sense. Luckily, there is a small but nice cafeteria in the adjacent building so I use the time instead to go for a walk in the woods and listen to some podcasts. I pick-up lunch on the way back. At least this is the ideal. Sometimes we are scrambling from meeting to meeting so I just pop over and get something and pop back.
I typically spend about $4.00 at lunch – one guy rings it up as $3.97 and everyone else rings it up as $4.13. Whatever.
Now the extrapolators go wild. 260 workdays a year * $4 a day, that’s over $1000 a year. Why in 50 years that could be ….
Slow down math genius.
Yes, there are 52 weeks a year and 5 days in a work week, so I get why you used 260. But we all know that is not right.
For starters, there are about 10 company holidays. Additionally, I get 30 days a year leave. Sometimes the company brings food in for lunch. Sometimes vendors bring food in or take us out to lunch. Sometimes I work from home. Sometimes I go to conferences, training, or other business trips. I do not spend that $4/day for lunch every workday. Not even close.
Since I always use my credit card I just checked. In the last 12 months, I paid for lunch at the company cafeteria a total of…. drum roll… 88 times. The bill was $351.16. Now subtract $2/day for the lunch I might have packed, $176 and I blew the princely sum of $175 last year on lunch at work.
As I am 61 now, I don’t have that much time for compounding left. If I got three doubles (one every 10 years), that $175 would be worth $1400 30 years from now. I’m good.
And that is my second point – I am already investing plenty and have accumulated a decent portfolio. Could have done better for sure. But objectively, $1400 30 years from now will not affect my withdrawal strategy today. I’ll be OK.
I realize the lecture was not really meant for me, but still, please be careful of too much extrapolation. It’s bad for your health. To my knowledge, no extrapolator has lived to 120.
Finally, let’s round this post out with a little fairness, because I did not tell the full story. We often go out to eat on Fridays and I do spend more at a restaurant than at the cafeteria.
To be clear, I said often. I do not mean every Friday. Last year, the number was about 30. I am not certain because the transactions seem to post late and there is a branch of one of the restaurants close by (so I may have grabbed dinner or a weekend lunch there a few times) so 30 is tops. Total spend was $326.75, or about $11 per event. If I had eaten at the cafeteria, I would have saved about $210. If I had packed a lunch I might have saved about $270. Thirty years from now, these sums might be worth $1680-2160. Ouch. Such a waste. Bear in mind that I will be 91. I might be eating baby food then. Again, I’m good with these decisions.
Note that I enjoyed the food and the company and the time out of the office for all of this reckless spending. I can live with this. What’s the point of life if you don’t enjoy yourself occasionally?
As I see it: The total tab for this hedonistic, over-the-top, out-of-this-world, lifestyles-of-the-rich-and-famous spending: $327 + $351 = $678. Not $1000, not $3650. If I had packed a lunch those 118 days, that would have been $236, so I ‘wasted’ (your opinion, not mine) $442. Less than 1/4 of 1 percent of our annual household income and a ridiculously small percentage of our net worth. I can afford it. My retirement will not suffer.
Postscript: I have received a few reactions that I want to share.
1. My daughter edited the post for me to make it more understandable – she told me she likes it. Her editing was helpful and much appreciated.
2. My son read it and said it was too combative. Probably true. I feel that extrapolation is being overused as a tool of persuasion. He pointed out that the extrapolations I cited were not meant for me. They were meant for people who have not started or are earlier in their FI journey. Also true.
3. I left out a major point – trends do not continue. Periods of inflation either result in a new government or currency or a more intelligent end to the inflationary spiral. Countries do not stay economically stagnant forever. Stocks go up. Then they go down. Then they go up again. Malthusians posit that eventually a population runs out of food or energy or other critical resources and war/famine/pestilence follows and the population reduces. The Population Bomb makes this point. This did not happen either. Nor have we run out of oil (at least not yet) or any other critical resource as predicted by this book and others in the 1960s and since. We find other solutions. At least we have so far. That is really why extrapolation taken too far is a dangerous thing. My lunch costs are a trivial example. I am not suggesting it should not be used. Just that it should not be over-used.
4. The comments section is not working – I need to figure out why. Please post in the ChooseFI site until I get this fixed.