Complaints about wages are rampant in the current news. The common wisdom is wages are too low for people to save for retirement or even pay for basic needs. Today I will dispel this common wisdom and prove 1.) Minimum wage, while not very much, is more than enough to live on; 2.) You can get a pay increase even if the boss refuses to pay you more than the minimum wage; and 3.) Early retirement is possible even at minimum wage and in fact you are more motivated to reach early retirement goals when you are locked at the lowest pay scale allowed by law.
I know I’m coming across as a dick to many people. But I’m right and you know it. I can and will deliver on all three points above in one short blog post. The problem with reaching these goals is you and your spending habits.
My dad grew up on a farm and started his own agriculture repair business back in the early 80s. He noticed his employees were no better off regardless what he paid them. Some were paid very well and still were flat broke.
I see the same thing in my practice among employees and clients. With a larger group to sample, my data is conclusive: Income is not the problem, spending is. Where you live has nothing to do with it. Nothing! Living in a high-cost area of the country usually means minimum wage is higher than the federal minimum wage. Since a few will refuse to believe me, I also included point #2. If you are so underpaid you should be excited to know I can guarantee you a pay increase on a regular basis. That means minimum wage will be history for you, my friend, and your employer can’t do a damn thing about it.
The Math of Living
We will start with some simple math. The federal minimum wage is currently $7.25 per hour. Working a full-time job (40 hours per week times 52 weeks) comes to $15,080. We will not assume any overtime, holiday pay, benefits or that second job you have to fund your spending habits. A married couple or similar arrangement means both people involved can work a full-time job, turning the annual household income into $30,160.
Let me remind you, several personal finance bloggers spend less than $30,000 per year. Mr. Money Mustache spend around $24,000 per year and your favorite accountant spends a sliver under $30k per year. And neither of us are depriving ourselves of anything. We have rich, full lives with plenty of time for family. (Even during tax season!) Therefore, the argument that minimum wage isn’t enough to pay the bills falls dead.
Before the tears start flowing as you point to the kids, need I remind you if your family income is ~$30,000 and you have children, you get the Earned Income Credit and Childcare Credit. And, by the way, I have two daughters and they never starved.
Another complaint is taxes. FICA robs you of $2,307.24 a year as a couple at minimum wage, leaving you with a meager $27,852.76, or $2,321.06 per month, or $535.63 per week. I promised no tax advantages in my calculations. Any tax credits or deductions are all bonus money to you and makes my work harder to prove my point. (Sucks to be me.)
MMM spends less than your take-home pay and I spend a fraction more. And neither MMM nor I are really cutting back on anything. You, on the other hand, earn minimum wage, will need to. At least for a little while. Remember, I promised you a wage increase.
For single readers, I hear your plight. At minimum wage you net $13,926.38 in annual income working full-time. Here I remind you of Mark Cuban, the billionaire owner of the NBA’s Dallas Mavericks and a cast member of Shark Tank. A recent CNBC article mentioned Cuban considered himself wealthy when he was young and living in an apartment with five other guys. He slept on the floor and was still happy so he considered himself successful. Yes, if you are single it is CHEAPER to live because you can make choices no one else has to live with. I lived a lot cheaper before I met Mrs. Accountant (about $9,000 per year). Mrs. A is not a spendthrift either. I would never ask her to live out of a car with me or shack up in a small apartment with several other people unless things got really bad. (I’m getting soft in my old age.)
Of course, you might actually make a few pennies more than minimum wage or get some overtime or a few benefits from the employer. You might work a second job to support spending habits. You can keep doing what you are doing on the income end to maximize annual household income. For the rest of us it is time for a self-imposed pay increase.
Show Me the Money
Getting a pay increase is so easy it amazes me so many people refuse to ask for it. The best part is you can’t be refused. Your employer can spit nails for all you care. You are still getting the raise. And here is the best part: you pay no FICA taxes on your raise and there is a special part of the tax code which taxes this raise at a very low rate, and for many people the rate is 0%! Rich people have been doing this for decades. How do you think they got rich?
It gets even better! Once you ask for this special pay increase you are now entered in an automatic pay increasing system. Your new pay raise will get raised approximately 7% every year: some years more, some less. Over a decade you will look back on your initial raise and realize it was increased ~7% per year compounded annually. (I hate when they make getting rich so automatic. It’s easier to bitch about poverty when you refuse to accept income increases.)
It looks like a few of you are skeptical. A larger part of the crowd is near rupturing an aneurysm in anticipation of the secret pay increase. The wait is over! Here it is. Are you ready? Better sit down. Don’t want any unnecessary medical bills from a fall.
Getting your guaranteed raise requires priming the pump. What I need you to do is this: I want you to save about 35% of your take-home pay. You pull $27,852.76 a year net. I want you to save (not spend!) $9,852.76 of that take-home pay, leaving you with a cool $1,500 a month to live on. Now I want you to take that $9,000 and drop it into an index fund over at Vanguard. (Don’t do this with a work retirement plan like a 401(k)! The tax savings and tax credits coupled with your guaranteed pay increase might be more than your heart can handle. Ah, screw it! If you have a 401(k), go for it. Your heart can take it.)
Guess what happens after the first month of doing this? Yup, you get a dividend. No matter what the stock market does, you get your juicy dividend. The best part is they reinvest the darn thing and it in turn earns a dividend. As if that isn’t enough, those dumb-ass companies keep throwing money away increasing dividends. Bastards! There ought to be a law. These idiotic businesses owned inside your index fund tend to increase dividends around 7% per year; sometimes more, sometimes less. (Getting all that free money you didn’t work for. How do you live with yourself?)
I can see the young man crying at the back of the room. You have debt, don’t you, son. Don’t talk! I can see you nod. Would someone pass my hanky back to the fine gentleman? Thank you.
I’m glad the debt question came up. I sometimes forget to mention it. Debt is a bitch; I get it. So, tell me, what interest rate are you paying on your debt? Credit cards? Ohhhh. Eighteen percent. I see. Hmmm. That’s bad. Well, you need to take a different approach. The good news is you get a bigger pay increase to help you get out of debt faster. Remember the nine grand? Wonderful! Apply it to retiring debt. Every dollar you pay off is 18% interest you don’t have to pay anymore. Each payment does more lifting than the prior payment due to less interest accruing. Ahhhh, it’s nice to see the young man at the back of the room smiling.
And your net worth has nothing to do with it. You get the same dividend rate on your index fund investment as I do. If you have a negative net worth, each debt payment still increases your net worth; it’s just a bit less negative. Then the day come when you are no longer digging out and you start building that pile of cash you always dreamed of owning.
Early Retirement at Any Wage
Now we turn to the last point I promised: early retirement. Normally I recommend saving half your income. Because you earn minimum wage, I cut you a bit of slack. Don’t consider it a favor. My largess means you have to work longer.
Investing half your income means you can retire in about 17 years. At 35% it takes 25 years. Still a far cry from the conventional wisdom it takes 40 years if you get there at all. Things always seem to work better than planned so you should arrive sooner than expected at retirement, but let’s stick with the numbers.
I define retirement as having liquid investments 25 times spending. Your judicious saving and investing, using long-term market averages, brings you to retirement in 25 years, saving 35% of your take-home. The alternative is to keep that minimum wage job firmly in your grasp.
Asking the Impossible
Living on $1,500 a month is impossible. I read it in the Bible: Second book of Maccabees. Of course, I am full of shit. Dividends are not really wages! Remember, I said your income would increase. I upped the promise by providing income taxed at a lower rate. I also said your boss couldn’t do a darn thing about it. She can’t, either, can she?
Fifteen hundred a month IS impossible to live on! I get it. You live in ________ and the cost of living is high. Hey, if rent is so darn high locally, why not buy a small RV and live out of it or pull a Mark Cuban. Just saying. Dump the car and bike or walk to that minimum wage job. Bend your boss over and service the account by saving half your income. What is your boss going to do? Fire you. Big deal. Get another minimum wage job! And you have plenty saved to get you through a dry spell and spending habits that make your financial plan nearly bullet-proof.
Ah, but I must be wrong! I invite you to remind me how wrong I am in the comments below. My feelings can take it. Of course, I am wrong! How could any of this work? If I were you I would keep doing what you have always done. Somebody has to serve me my Happy Meal.
[Update: Joel over at Financial 180 informed me he wrote an article in the same vein recently. I checked it out and think you should to.]