Thriving on Minimum Wage

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Minimum wage to riches.

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.

Millionaire a penny at a time.

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.]



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Keith Schroeder

17 Comments

  1. Mr. D on March 15, 2017 at 11:48 am

    Great article. I have several employees who I pay double minimum wage. Both live with significant others who also work. Cost of living in my area is somewhere near lowest in the county. Both are perpetually broke.
    If you want the lifestyle portrayed on cable tv and in pop culture (new car, new gadgets, lots of random spending… like everyone seems to expect for some reason) minimum wage won’t cut it. Darn… $25 an hour won’t even do it the trick for that.
    If you lower your level of requirement great things can happen.
    My wife and I and FOUR kids live very comfortably in a brand new 3000 sq ft home. Our yearly budget? An absolutely extravagant $38,000 a year.
    I know… 40k is way to much to spend. We used to live on 24k but have gotten a little spoiled. Teenagers eat a lot of food too… We’re saving close to 70% of our income. And both self employed. Both limited to high school educations.
    Go figure.

  2. Mitch on March 15, 2017 at 12:06 pm

    Great point to make, but did you consider babysitting costs related to a working couple? And of a single working mother (of which I am one.) MMM waited for retirement till he got his kid. I got government subsidy for child care since I was working 6 days from 8 to 6pm from when she was 4 months old, but I still paid 500 dollars per month for that, it was a great bargain, but there it was.

  3. Keith Schroeder on March 15, 2017 at 12:14 pm

    Sure did, Mitch. I kept kids out of the post example as much as possible to keep the math simple. At minimum wage your income is low enough to get a massive Daycare and Dependent Care Credit and Earned Income Credit, more than enough to cover daycare costs with modest planning.

  4. Nancy on March 15, 2017 at 12:20 pm

    Hello,
    Which index fund over at Vanguard do you recommend? My daughter has had money in a fund with Fidelity and it has not earned a dime in years.

    • Keith Schroeder on March 15, 2017 at 12:28 pm

      I use the S&P 500 index fund, but the Total Market index is also fine. You want a broad-based index fund is all.

  5. Gigi on March 15, 2017 at 2:38 pm

    Are you assuming employer-provided health insurance in each case? I think that’s the one legit thing in the US that seems to take people under. It’s one of the big reasons I left the US; I live a much richer life on less money in Europe largely because health insurance and healthcare are so much more affordable.

    • Keith Schroeder on March 15, 2017 at 2:50 pm

      I assume no such thing, Gigi. If you are pulling down minimum wage the ACA provides free health insurance with the tax credits. In many states you also get Medicaid at those income levels. I agree it is easier in other countries, but my point is you can also do it here, too.

  6. Jeff Brown on March 15, 2017 at 3:06 pm

    Oh Cool, Live on $1,500/ month… Great Advice….

    Mortgage is $1,700 (as is comparable rental prices in our modest 2b 2b home)
    Utilities are $ 600.00 (Bare minimums)
    Food – Costs Money
    Childcare credit does NOT offset childcare costs (unless you have some sort of welfare or family arrangement)

    I make far more than minimum wage and have a fairly bland lifestyle on dual incomes, but there is not a chance anyone in the great state of CA can live off $1,500.00

    And paying off debt is not giving yourself a wage increase, it is simply reverse offsetting previous wage shortcomings.

    BULL – SHIT

    • Todd on March 15, 2017 at 7:19 pm

      You sound like my friend who thinks living in Brooklyn is a human right. A consistent theme of this blog is learning to own your choices and living in California is nothing more than a choice.

    • Joel on March 16, 2017 at 8:00 am

      Jeff, having a $1700 mortgage and $600 utility bills is your decision. You chose to have these fancy luxuries. You can downsize. You can relocate somewhere much more affordable. You can change jobs. All of these things are within your control. CA is one of the most expensive states in the nation… you are living luxuriously.

      I live very comfortably on less than $30k per year. I have no debt. I have a small house that cost less than $200k and I paid it off. My taxes and insurance on the paid off house are less than $2000 per year. I drive an old car I paid off. I pay maybe $200 per month in utilities on an expensive month. You could do the same. It’s your choice…

  7. noreen on March 15, 2017 at 9:17 pm

    Just wanted to point out that MMM lived on under $25k/year while having no mortgage payment.

    As you were…

    • Keith Schroeder on March 15, 2017 at 9:40 pm

      Noreen, I have a client named Pete, not to be confused with Mr. Money Mustache, who never spent more than $12,000 a year in his life. He has been a client for decades and is my age. He also owns his home free and clear. He bought a beater house and slowly turned into a nice home with his own sweat. He saved until he could pay cash for the home. I know this doesn’t work in many markets, but it does work in many more. He saved like crazy for less than 10 years and paid cash for his home (under $50,000). Prices are higher today, but these types of opportunities are available in all but the most overpriced markets.

      The link I used to the MMM blog on his spending is the latest I could find. His spending has since declined to $24,000 annually. I can say that with confidence because he published it and I do his tax work. What I didn’t say in the post is that I lived on $9,000 a year in the early days of my marriage and that included a mortgage payment. The mortgage payment was $515 a month and included tax and insurance. Yes, Mrs. Accountant and I spent less than $3,000 a year on everything else. And we were happy. We spend more now because we (really I) wanted to live on a farm and there are more expenses involved. If money got tight I could live on less than $10,000 a year again. Today it is easier than back when I got married. We really have life good today.

      Also, I never mentioned in the post I made 50 cents and hour working for my dad’s business straight out of high school. Minimum wage was $3.35 an hour back then. (Yeah, I’m an old guy.) I worked taxes on the side and made more at that than turning a wrench in my dad’s company all year long. (Yes, my dad and I get along fine. We play cards every weekend with neighbors.) I found ways to make more, but never made a lot. By age 32 my net worth crossed the seven figure threshold due to obsessive saving and investing. This post is not about scolding; it is about encouraging people who feel they have no hope. They can do this as I once did. My goal was to make people mad enough to take action. It is the only way.

  8. Jerry on March 17, 2017 at 8:48 pm

    I have been thinking about this for a while. I am not sure how you can say that MMM lives on $24000…He basically built a cool shed on his property for $31000. ..some people golf, some hunt/fish, other build basassity projects..all hobbies in my opinion and need to be counted against ones spending. Yes I know that MMM can easily afford this and I guess you might be calling this an “investment”. from what I read, pretty much most home improvements although nice generally aren’t great investments . …Now if I remember correctly MMM also donated something like $100000 to a few organizations I would not count this against personal spending. So Keith, I guess my question is, what do you count against FIRE spending. In my view, if your are spending 1/25th of your nest you need to count all of it

    • Keith Schroeder on March 17, 2017 at 9:52 pm

      I do not consider charity donations spending anymore than I consider charity activities a job and demand a wage when the project is completed. Investments are not spending either. Business expenses are not personal. If they were, my payroll to employees would be an expense and it is insane to consider employee wages personal spending. Investing in your home is still investing. If MMM invested in an index fund, is that spending? Not at all! When you have excess funds you will invest those funds. There are many investment opportunities. Real estate is one of those investments. If it was a rental property would it change the nature of the investment? Sure it would. It would go from a non-income producing investment to an income producing investment. If you have less to invest or donate you invest and donate less. Warren Buffett is not spending billions because he donated to the Gates Foundation. You can only invest what you have. Finally, I agree, real estate is not always a good investment. However, using that reasoning, an actively managed mutual fund or a hedge fund (see the news on Buffett’s bet against hedge fund managers) is not a great investment either and I have not, todate, seen anyone call that spending rather than an investment.

      • Jerry on March 18, 2017 at 5:38 pm

        I absolutely agree. you have it you can spend it..My questions seem to mostly about the people that don’t have the extra cash ….Maybe I am too conservative, but when I budget I always have a car repair/replacement fund and a home maintenance fund..although both may be totally paid for, they must be repaired, maintained or replaced. I never seem to see these items in peoples’s budgets when people say they live on XX dollars a year. If you retire at 40 and are healthy, you will need at least 2-3 more cars, appliances, a new roof etc. or need to pay rent to avoid those expenses

  9. Chad Burkholder on March 17, 2017 at 9:57 pm

    This article inspires me. I don’t get to save most of my income because of a failed business and poor tax advice. I have to pay the IRS $1000/mnth for the next two years (hopefully one). I pay a ton on my mortgage as well but it will be paid off quicker. Once this two things are paid for I can easily live on $15000/year. Thanks for the inspiration!

  10. WhateverMeansNecessary on March 22, 2017 at 2:58 pm

    People like motivational phrases like: You are the sum of all your choices! …except when applied to finances. It’s is interesting to me how pervasive the victim mentality is when it comes to money.

    Love the message that YOU can control your expenses–not your city, your location’s average income, your demographic, your peers, your past, or your current income.

    We are a family of four, living on the equivalent of one Minimum Wage income plus the child tax credit ($17,080 for the year). Even with that, we still have room to splurge. After a few month of readjusting to our self-imposed Minimum Wage budget, we are back to feeling like we did back when we spent double.

    We realized that we had started justifying our expenses based on the fact that we were a family living on one “lower than average” income. Like everyone else, we could either change that trend, or plan on working indefinitely.

    (By the way, you can thank JLCollinsNH for sending me your way.)

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