“The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.
Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.
But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that’d still be keeping his feet dry in ten years’ time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.
The Sam Vimes “Boots” Theory of Economic Injustice is the brainchild of Terry Pratchet as posited by the fictional character Sam Vimes. I don’t think it was ever intended to be a serious economic analysis, but I constantly see it quoted and mentioned on sites such as Reddit, as if it is. When held to the same scrutiny of an actual economic theory, it has a lot of holes, no pun intended. If you look at the Forbes 400 list, all those people became wealthy not by saving money but by either earning a lot of money or iniheriitng it. A Rolex will last a lot longer I’m sure than a cheap carnival game watch, but unless you live to 1000 or something and plan on buying a lot of watches, such a large purchase will make you poorer, not richer. Look how much credit card debt people get into buying expensive things.
It’s true that poverty is more expensive in the long-run. Laundromats are more expensive over the long run than buying your own washing and drying machine. Same for renting versus buying. But getting rich takes more than just saving money, in the long-run. You have to make a lot of money . From what I have read, people who achieve financial independence early in life–such as on popular subs such as /r/financialindependence, /r/investng and /r/personalfinance– have good-paying careers, and that money is invested in stocks and a down-payment on a home while also keeping other expenses low. From my own empirical observations, there are no truck drivers, fast-food workers, or door greeters retiring at 35-45 with a couple million dollars, but there are some in tech or legal who have.
In summation, people get rich by making a lot of money while keeping recurring expenses low relative to income, and then investing the excess in compounding investments such as stocks and home equity. The biggest recurring expenses include mortgage expenses, rent, insurance, student loans, auto loans, and credit cards. However, these costs tend to stay fixed at an individual level relative to income. So While a doctor, a lawyer, or a tech worker may make 5x as much as a secretary, it’s not like the living expenses of the former are 5x as much as the secretary, but maybe only 1-2x as much depending on student loans and cost of living. A secretary can barely keep up with the recurring expenses and thus never has any money left over to invest with, but the tech worker, even in a high cost of living area such as Silicon Valley, can still have a lot of residual income with which to invest with.
Also, people lose lots of money, not by making a lot of frequent low-quality purchases (such as overpriced Starbucks coffee or leaky boots), but by ruinous one-time purchases such as overpaying for a home during a bubble or losing a lot of money heeding a bad stock tip. This is why people on /r/financialindependence and /r/investing stress indexing instead of buying individual stocks, because by buying the S&P 500 you are guaranteed to capture the total return of the market, which is safer than trying to pick winners.
But what about the argument that the costs of living in Silicon Valley are too high, even for STEM workers, unless you’re a multi-millionaire. Gwern likens it to ‘gold handcuffs’. But when you break down the numbers, it’s possible to still have a lot of residual income living in the Silicon Valley, even with only earning a low six figures. Gwern writes:
These points mean that employees will have a hard time saving up large amounts of capital to serve as cushions, retirement savings, or seed investments for a startup of their own; they will be risk-averse to being fired or switching jobs, as those incur loss of working time/salary and risk extended periods of unemployment, and, perhaps most importantly, startups – which are cash-poor equity-rich – will struggle even more to be founded or then hire employees. After all, how can a startup compete with a FANG or AmaGooBookSoft or whatever big tech company offering salaries like \$200k+ & perks to the best software engineers? Sure, that startup might be able to offer them handsome stock options with an expected value (in the very distant future after the increasingly-hypothetical IPO) of say \$150k, but this equity is effectively worthless to an engineer who needs to make rent now. A FANG, on the other hand, can pay cash on the barrelhead and throw in some options as a bonus, for that old-time SV flavor.
If you make $210k/year, after taxes you are still taking home $135k/year. In Silicon Valley, the median rent for a one-bedroom apartment is $2,300 a month. So you are still left with $107k. Not bad. Add $1,500/month for other misc. expenses such as food and health insurance and internet access and phone plan and car payment for a crappy car (no need to splurge). Still have $89k. This is not even counting stock compensation or sign-on bonuses or other perks. Of course, if you add children to the equation, expenses rise dramatically, but this can be offset to some degree by having a double income family.
What about student loans? The debt is not that big of a deal if the pay even just mediocre. The wage premium from having a degree, especially if you major in STEM, makes it worthwhile in the long-run despite the student loan debt. Let’s say you get a $100k student loan to get a master’s degree in a STEM subject, and the interest on the loan is 6% fixed, and the duration is 15 years. The payments are only $850 a month, which relatively speaking is tiny if you’re earning post-tax $70+/year, which is not uncommon for STEM graduates. You are only paying $10k/month for loans for $70k/year of disposable income. Yeah, you have to factor in living expenses, but with the exception of rent and insurance, those tend to be constant regardless of location and profession.