Targets for Mustachian Wealth Accumulation

In the William Danko and late Thomas Stanley classic The Millionaire Next Door, the authors talk about two different types of people who handle their money in ways that either lead to wealth over the long term or lead to mediocrity or poverty.  These are Under Accumulators of Wealth (UAWs) and Prodigious Accumulators of Wealth (PAWs).  UAWs are likely to always stay in the lower and middle classes, while PAWs, even if they start out in a disadvantaged financial position, are likely to move into the upper class at some point in their lifetime.

The Classic Millionaire Next Door Approach

The original formula laid out in page 13 of The Millionaire Next Door takes into account two variables to determine this classification: age and income.  It is as follows:

Multiply your age times your realized pretax annual household income from all sources except inheritances.  Divide by ten.  This, less any inherited wealth, is what your net worth should be.

In order to be considered a PAW, your net worth should be twice the expected level.  To be considered a UAW, your net worth would be half the expected level.  In short, this is:

PAW if Expected Net Worth > 2*(Age*Income)/10

UAW if Expected Net Worth < 0.5*(Age*Income)/10

This a good starting place to determine whether you are truly on the path to becoming wealthy.  However, it doesn’t really take into account all of the right variables.  I mean, what if you are 22 years old, have been working for a year, and are absolutely killing it making $100,000/year?  Is your net worth really supposed to be $220,000?  News flash – you’ve only been working for one year, your net worth might be negative because of student loans.

The Arebelspy “Normal” Approach

Essentially, time to accumulate wealth is factored in linearly, when it really should be considered exponentially.  Fortunately, someone has come up with something better.

Arebelspy, one of the administrators on the MMM forums, suggests an exponential formula for tracking how “on track” one is to building wealth, measured against an aggressive but doable benchmark.  Formula number one is:

Expected Net Worth = (EXP(0.075*(Age-20))-1)*Income

This is a lot more reasonable, as it has lower expectations for wealth building in the early years, but exponentially increases as one gets older.  Let’s take a look at an example of someone who starts out at 20 years old and makes $35,000 per year, which isn’t unreasonable for a variety of entry level positions.  We’ll assume their pay increases by 3% per year, so the amount they should have in expected net worth correlates with their increase in income over time.  The graph below shows a comparison between the arebelspy formula and Dr. Stanley’s.


 This seems pretty reasonable.  You can get to that level of wealth by contributing $925 per month over a 45 year period with a 7% investment return.  Or, if your returns were a little better, say 8%, you’d only have to contribute $675 per month.  Don’t get me wrong, this would definitely be a lot in the early days – if you’re making $35,000 per year pre-tax we’re talking about $11,100 per year in savings for the 7% scenario and $8,100 per year in savings for the 8% scenario.

Assuming an effective tax rate of 15%, this equates to a 37% and 27% savings rates on net income, respectively.  This is definitely more than the norm, but it is also doable.  This is even more so if you look ten years out in both of these hypothetical scenarios.  At 30 years old, let’s say your income compounded at 3% per year since you were 20, so now you’re making a little over $47,000 per year.  Now, using the same assumption for taxes, and the investment amounts, you’d only need to be saving 27% or 20% of your net income to hit $3,350,000 by age 65.

Basically, if you can save about 25% of your net income throughout your working lifetime, you’re golden.  You’d be able to retire comfortably within about 30 years (assuming a 4% withdrawal rate).  Your assets wouldn’t have to grow very aggressively, at a 7% or 8% long term rate of return.

What about if you are truly a hardcore saver though?  What if you consider yourself a Mustachian, and saving 50% of your net income is what you consider normal?

The Arebelspy “Hardcore Mustachian” Approach

Arebelspy offers a more aggressive formula for this type of person.  It essentially doubles the exponential rate of growth that is expected for a person at a given age and income level:

Expected Net Worth = (EXP(0.15*(Age-20))-1)*Income

Now is where things get interesting.  What does this data look like?  Let’s first look at the initial 30 years of a Mustachian’s working life.  Note that here, I’m assuming that the person in question earns an income and invests for 45 consecutive years, although I am well aware that many (the majority?) of Mustachians seek early retirement as their goal and actually plan to not work once they hit their “number.”


Here there’s a dramatic difference in expected net worth.  By the age of 50, the formula tells us that our hypothetical hard-core saver should have over $7,500,000 in investments.  Whoa!  Initially, I crunched these numbers with the same income and rate of return assumptions – $35,000 per year at age 20 and 3% raises thereafter.  I looked at an 8% long term rate of return.

It didn’t really add up, because even if you saved 50% of your income throughout this period, there’s no way you would hit $7.5 million with these assumptions.  Let’s say at 30 years old, you’re making $47,000 pre-tax, like before.  Let’s say you were saving 50% of the after-tax amount, or about $1,660 per month.  This would already be pretty difficult, as you would be living on $1,660 per month as well.  Additionally, this is far less than the $5,150 per month required to hit $7.5 million at an 8% rate of return.

Ok, so assuming that the variables of time, salary and age are not altered, a higher rate of return on one’s overall portfolio would need to be responsible for this kind of growth.  To be fair, in the thread where this topic was thoroughly discussed, arebelspy admits that the formula works best for the first 15 years of compounding and for someone with a 50-75% savings rate.  In our example, at 35 years old the expected net worth for a Mustachian saver is a little bit over $460,000.  This equates to about $1300 invested per month consistently over that 15 year period, with an 8% rate of return – definitely reasonable based on our assumptions of someone who is a hard-core saver.  In the beginning of one’s career, that’s a 52% savings rate, while at age 35 that’s a 39% savings rate (again, accounting for taxes and a 3% annual rise in salary).

From that point, in order to go from $460,000 to $7,500,000 between ages 35 to 50, it would take $17,250 per month (!) to hit that number with 8% annual compounding.

Ok, so this model works great for the first 15 years on one’s working life for hard-core savers.  What would work well over a longer period of time though?  How would I do it?

The Old Man Mase Approach

 I think that standard milestones to shoot for should be based mainly on two things: savings rate and rate of return of one’s investments.  These parameters should both be somewhat aggressive, but yet conservative enough that they are actually achievable.

I’ve chosen two scenarios – a “standard Mustachian” approach and a “hardcore Mustachian” approach.  For the standard approach, I’m assuming:

  • 50% savings rate
  • 8% growth in investments annually
  • 3% growth in salary annually

The most difficult part of that scenario is probably the savings rate.  It can be hard to get to saving 50% of your income, especially if you start out not making very much.  However, once your income increases a bit and get a few expenses under control (including probably eliminating debt), there becomes enough margin to get to that 50% mark.

For more hardcore Mustachians, saving 60%+ is possible with discipline (or with a very high income without a lot of discipline, ha!).  For this scenario, I’m assuming:

  • 60% savings rate
  • 8% growth in investments annually
  • 5% growth in salary annually

The 5% growth number for income increases is reasonable I think, with some concerted effort.  I’m not saying that income increases would come in this scenario all at once, because we all know that this tends to happen in fits and starts.  One year you get promoted, while the next couple of years you get cost-of-living raises (2 or 3%).

I used the future value of a growing annuity formula to come up with the values for expected net worth in both scenarios:


By tweaking two of the variables in just a small way, you can get way better results over time.  Let’s look at the “Old Man Mase Milestones” for saving under these scenarios.


We see that with the Standard Mustachian approach it would not be unreasonable for someone starting out making $35,000 per year to reach age 65 as a decamillionaire.  They’d be able to retire much sooner than 65 however, around the age of 37.  Net worth around this point would be about $716,000.  With a 4% withdrawal rate, they’d be able to live off of $28,640.  This would cover all of their living expenses since they’d be making around $56,000 per year at the time, and living off of half of it.  If you wanted a little bit more margin of safety at this point, you could just work three more years until age 40.  At that point you’d be set for life with about a $1,000,000 portfolio that you could live off of (theoretically) forever.

With the Hardcore Mustachian approach, you’d reach $16,000,000 by 65, or 60% more wealth than the Standard Mustachian.  You’d be a decamillionaire before hitting age 60, and able to retire at 35 or 36 (with a bigger margin of safety at around 38).

I think this form of an equation is reasonable because it accounts for all of the important variables: years working, savings rate, investment growth, and income growth.  All of these numbers play a part in determining the ultimate outcome.

With that said, when people say things like, “it’s excusable if someone doesn’t retire a millionaire in America today”, I generally agree with them.  Barring large unforeseen medical expenses, or other major negative life events, if someone is not able to save $1,000,000 over a 40 year career, they weren’t really trying.

Additionally, if someone who considers themselves Mustachian, and discovers the path to financial independence in their 20s does not have a massive net worth by the time they are 65, they weren’t really making an effort to put a lot of money away and/or putting it in bad/mediocre investments.  Isn’t it amazing though that someone can amass so much wealth simply by saving 50% over their working lifetime?  (I say “just” 50%, but I recognize this is a difficult feat if you haven’t yet been exposed to many of the strategies and tactics used to work toward financial independence.)

It’s still crazy to me, and it is a concept that will probably never get old.  I’m still too young to be able to fully appreciate the power of compounding, but just looking at the math is really inspiring.  To be a wealthy Mustachian (am I being redundant there?) all you have to do is pretty much save 50% of your income and keep working hard.  Eventually you’ll get there.  Further increases in income and investment returns can supercharge your results, but it’s not necessary to make crazy assumptions – and that’s what makes this whole financial independence thing so exciting – it’s actually attainable!

33% of High Schools Now Teach Dave Ramsey

Did you know that just about 1/3rd of all high schools in the U.S. now teach the Dave Ramsey curriculum Foundations in Personal Finance?  It’s a high school curriculum that teaches basic financial principles such as budgeting, staying away from debt, and saving for the future (investing basics).

Dave_RamseyFirst of all, I think that this is awesome.  When I was in high school, I had “Economics 101” which taught me a few things, but I mainly concerned with passing the tests to get my A and moving on.  It didn’t excite me about personal finance or investing.  That didn’t happen until I was in college.  I vaguely remember learning some of the basic concepts such as supply and demand, and maybe a little bit of history about some of the major financial events that have happened since America was founded. Nothing seemed very relevant to my personal life.

If I was in high school now, I’d definitely appreciate it if my teachers and administrators pushed for the Foundations of Personal Finance curriculum.  I’m not saying it would be extremely entertaining from the perspective of a 16 year old kid, but it probably wouldn’t be so dry as those presentations and textbooks I had to look through in Econ.

So, what are the implications of this class being taught to millions of high school students around the country?  Will we slowly become a generation of savers, investors, and debt-shunners?

Unfortunately, I don’t think it works like that.  While I do believe that, overall, the country will have a greater level of financial literacy – or at least awareness – because of Dave’s teaching materials, it would be foolish of me to think that every other teenager in America is going to latch onto the “avoid debt” bandwagon.

There will still be credit card companies pushing the idea that FICO scores are a necessity – that you should build it up so you can borrow money for a starter home at some point, and then you should keep it up so you can borrow even more for a bigger home later.  There are still flashy car commercials, banks that advertise for low-rate loans, and streets full of bars with unbelievable happy hour deals ($7 for a pitcher?  Sign me up!)

You can lead a horse to water but you can’t make it drink, as Mrs. Mase told me.  The problem with financial literacy efforts in this country is not just that people don’t know information – we live in the most information-dense period in history.  It is also the fact that people must have a real, emotional incentive to take positive action.

Information definitely comes first though, and for that, I applaud Dave Ramsey and his team for being so successful with their program.  Even just a few years ago, many high schools did not have basic personal finance classes.  Now, the barrier to the information part of the equation has been lowered.  We just have to get people to actually do the things that they are learning.

One of the unfortunate things about the whole situation of personal finance in America is that, in aggregate, we’re a complete mess.  If most Americans were relatively responsible with their financial affairs, Dave Ramsey wouldn’t be in business.  The majority (well, maybe around 50%) of the calls on his radio show are from people who are on Baby Step 2 in his program.  That’s the one where you’ve got $1,000 set aside already for emergencies, and you’re working and pushing as much as you can to pay off all of your consumer debt.  Really, there aren’t too many calls for Baby Steps 3, 4, 5, 6, or 7.  Once you make it to Step 3, you’ve pretty much got yourself together and are no longer on super shaky ground.  The sad thing is, most people are not even in that stage.  Look at our average savings rate right now compared to other countries of similar GDP:


4.9% right now.  It could be worse, but we could do a lot better America.  I’m quite impressed by the Swiss – almost 18% on average is something to be proud of.  Heck, Hungarians save more than us, and their GDP per capita is way lower.

When it comes down to it, we’ve got some work to do.  Budgets need to be made and savings accounts need to be opened.  I’m definitely grateful for Dave Ramsey’s high school curriculum, bringing the knowledge to the young-ins.  That’s only one piece of the puzzle though.  There has to be greater awareness of how controlling one’s finances can really change our lives for the better.  That’s why I’m so excited about the early retirement/financial independence movement that’s been going on on-line for some time now.  People are making radical changes in their lives and sharing it with the world.

Hopefully the journey I’m sharing here will add a little bit more to that inspiration 🙂

How Efficient are Grocery Stores at Generating a Profit?

Now that you know the OMM family has been eating more healthily lately, I’ve been thinking more about the profitability of various grocery chains.  How much profit do the larger chains generate and how efficiently do they do so?  I’ve heard in the past that groceries are a low margin business, and that kind of makes sense.  People don’t want to pay a premium for the necessities of life, so grocery stores have to make their money primarily on volume.

This time in my life coincides with another tool for investment analysis that I learned recently – return on equity.  I have come to learn that excellent, long lasting businesses tend to have bigger than average, sustainable returns on non-leveraged equity.  It has been said that the performance of a stock, held over the long term, will eventually revert to around the return on equity figure.  Although I have yet to do a lot of research to see what kind of data backs up this claim, I realize that this intuitively makes sense, when you break down the definition of ROE.  Let’s look at that.

Return on equity is a financial ratio that determines how efficiently a business turns its assets into profits.  In fact, the general equation is pretty simple:

ROE = Net Income / Shareholder’s Equity

This can be measured over a twelve month period, over a multi-year period, etc.  That’s the basics of it. What I learned though is, there is a better way to calculate this same number that isolates the different variables that comprise the equation.  This is thanks to Joshua Kennon’s writings over at

It’s called the duPont Return on Equity.  It produces the same number as the calculation above, but uses more variable to get there.  Namely:

duPont ROE = (Net Profit Margin) * (Asset Turnover) * (Equity Multiplier)

Let’s quickly define these terms:

 Net Profit Margin = Net Income / Revenue

Asset Turnover = Revenue / Assets

Equity Multiplier = Assets / Shareholder’s Equity

Net Profit Margin is how much money the company makes, after expenses, relative to gross sales.  Asset Turnover just relates the gross sales to assets, telling us how quickly the company is turning assets into sales, and the Equity Multiplier looks at how much of the Shareholder’s equity (assets – liabilities) is made up of assets.  Notice that is also tells us how much debt an enterprise uses in its capital structure, in relative terms.

Let’s look at what these numbers are for a handful of the largest grocery chains in the United States.  We’ll examine: Delhaize Group SA (DEG), Kroger (KR), Walmart (WMT), and Whole Foods Market (WFM).  There are other big grocery companies too, including some that are not publicly traded, but these are the big guys in the U.S. market right now that are.

Looking at each company’s most recent 10-K, all of the numbers needed to calculate the financial ratios mentioned above are there on the statement of cash flows and the balance sheet.  Here’s the data:


As you can see, each grocer has its own unique characteristics when it comes to business, and that is reflected in the numbers.  Look at Walmart for example.  It is a behemoth.  There were over $480 billion in sales in 2015!  It makes even an established national grocer like Kroger look small in comparison.

What about the profits though?  We can see that Walmart still has a net profit margin that is higher than the other two traditional grocers, Kroger and Delhaize Group.  Why?  I don’t know exactly, but it would make logical sense to me that this is the case because 1) Walmart is so big it has more bargaining power when purchasing goods from suppliers, and 2) Walmart has a more diverse product mix than traditional grocers, some of which provide higher margins.  For example, Walmart’s toy and electronic sections probably provide higher margins than their grocery section.

Interestingly, Whole Foods Market has the highest profit margin out of the group.  This is likely due to its emphasis on quality organic foods, which customers are willing to pay higher prices for compared to traditional grocers.

Looking at the equity multiplier is what I find most interesting.  Out of the four firms, Kroger is the most highly leveraged in its capital structure, with an equity multiplier last year of almost 5.0.  This leads to a higher return on equity – 30%, which is quite high.  If we break out the equity multiplier in the equation however, the non-leveraged ROE for Kroger is only 6%, which is not too impressive.  Although this is only a snapshot based on 2015, this leads me to believe that Kroger’s business model does not lend itself to as much free cash flow if debt was not part of the equation.

Check out the ROE and non-leveraged ROE based on the above data:


Delhaize Group is definitely the least efficient at generating profits of the four firms, both based on absolute ROE and non-leveraged ROE.  It also has the lowest profit margin.

What I find interesting is that, on a non-leveraged basis, Whole Food Market has the highest return on equity, at almost 10%.  That doesn’t seem too shabby!  Furthermore, Whole Food’s total debt burden is only at $65,000,000.  When compared to net income, this seems to be pretty good.  If management wanted, they could spend not even two months’ worth of the company’s profits and wipe out all of the debt.  However, since Whole Foods is a relatively young company and is still rolling out across the country (and world), I expect this debt, in absolute terms, will only increase as new locations are being built.

Although the return on equity figure is just one metric that can give us some insight into the financial health of a business, it is an important one.  It’s interesting to see that large differences exist between even just a few large firms that exist within the same space.

P.S. One interesting side note – I looked up the data for Publix, the huge grocery chain in the southeast.  Although the corporation is not publicly traded (the reason I did not include it here) there is public financial data out there on the internet because the firm does have shares floating around on the over the counter market.  The company’s management grants shares to many of their employees.

I found in interesting that Publix’s ROE figure based on 2015 data is 16%, and it’s non-leveraged ROE is a solid 12% – something to take notice of.  Publix has double the revenue of Whole Foods, but almost double the net income, leading to a profit margin of 6%.  In the grocery business, that definitely seems impressive.

I have memories of being a kid growing up in the Orlando area.  There was a popular Winn-Dixie grocery store that operated in one part of town.  One year, Publix opened a big new store right across the street.  My family immediately started shopping there because of the big new aisles and solid prices.  Within a year or two the Winn-Dixie was clearly struggling.  Although I haven’t shopped there in many years, I’ve got a feeling that Publix is a supermarket powerhouse, as my own anecdotal experience and a first glance at the numbers leads me toward that conclusion.