Absolute vs. Relative Standard of Living: What is Enough?

univ_brk

I’m currently reading University of Berkshire Hathaway: 30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting by Daniel Pecaut and Corey Wrenn. As opposed to a rehash of the BRK shareholder letters, it contains highlights from listening to Warren Buffett and Charlie Munger live during the shareholder meetings in Omaha, Nebraska from 1986-2015. (The equivalent of a live Beyonce or Springsteen concert for investing geeks.)

I’ve always appreciated that Buffett and Munger are very rational and practical people, and one theme that I picked up from this book was the concept of absolute vs. relative standard of living.

What is enough? You’ve probably heard some variant of the phrase “live like a college student” when talking about how to save money. I certainly used this tactic successfully for many years, and Buffett explains why it makes sense:

Buffett contended that the average college student has the same standard of living as he does. Same food. No important difference in clothes, cars, TVs. After you have enough for daily life, all that matters is your health and those you love. Likewise in work, what really matters is that you enjoy it and the people with which you work. Munger concluded humorously, “What good is health? You can’t buy money with it.”

Ask yourself: Does this make me healthier? Does this let me spend more time with the people I love? Does it give me valuable knowledge? Think about how a large portion of the luxury world exists without actually improving your quality of life: luxury cars, designer clothing, fancy purses, fancy watches.

Stop comparing yourself to others. Buffett reminds us that envy is the worst among the seven deadly sins. You feel miserable with no upside at all. (The rest are gluttony, greed, lust, sloth, wrath, and pride.)

If someone else is getting rich, so what? Someone else will always be doing better. He asserted that the notion that an investor or investment manager should be “required” to beat everyone else is nonsense. The real key is to know what you really want to avoid and give those things a wide berth (such as a bad marriage, an early death, and so on). Do this and life will go much better, he advised.

I think this concept is under-appreciated in the investment world. You manage to lose a little less money than a benchmark and you still “win”? Think about the people who have quietly gotten rich with rental properties. They don’t worry about benchmarks, they just make sure the rent checks come in and the building is maintained. When they can, they buy another property. Over the long run, it works out just fine. You could do something similar by regularly buying a Vanguard Target Retirement Fund, Vanguard Balanced Fund, or even Vanguard Wellington Fund.

Money vs. Quality of Life. Make no doubt about it, Buffett enjoys having a lot of money. I imagine he treats it like a video game with dollars instead of points. However, he separates money and quality of life. That’s what has let him decide to give almost all of it away to charity. He’s donated over $27 billion already, with a total amount that could be over $100 billion (depending on the future value of Berkshire stock):

Buffett added that as far as he’s concerned, he hasn’t given up anything. He hasn’t changed his life. He couldn’t eat any better or sleep any better, so he really hasn’t given up anything. Someone giving up a trip to Disneyland to make a donation is the one making a real sacrifice.

These simple quotes can provide a basic outline for early retirement. First, try your best to stop comparing yourself to others, as that’s a game you’ll never win. Besides, if you act and spend like everyone else, then you’ll be working as long as everyone else. Next, decide what kind of daily lifestyle is “enough”. Does that require spending $30k a year? $50k a year? $80k a year? Now work to save 25 times that amount. $30k a year = $750,000. $50k a year = $1.25 million. (You might want to revisit the “enough” question after doing this multiplication…) That’s a nice rough number. Now work on the income side of the equation while keeping your spending side in check. In the meantime, enjoy your awesome quality of life. Appreciate the good stuff like nourishing food, hot showers, comfortable beds, nature, air conditioning, friends, and family.

Comments

  1. I’ve been quietly subscribing to your posts for years. This is one of your best posts ever.

  2. I agree with Dawn: this is one of your most enjoyable posts in quite a while. Very inspirational and ….. comforting.

  3. Sage advice. I wish more people would take the time to understand what truly makes them happy.

    Another thing I would add is the concept of one’s circle of concern vs circle of control. The idea that you are happier when you focus on the things you can influence and not worry about the things you cannot.

    Just out of curiosity, have you set any personal guidelines for following the news? It can certainly have a negative impact on your mood if you consume too much of it. I usually try to browse the headlines just to keep an eye on what’s going on in the world, but sometimes it’s hard not to get sucked in.

    • Thanks. Great point about focusing only on the things you can control. These days there is so much going on.

      As for the news, I try to limit my exposure but even when I just try to read investing material (NYT, WSJ, WaPo, Bloomberg) the other headlines are hard to ignore. I mostly go back to your point about not worrying too much about what I can’t control while trying to find ways to make the world a tiny bit better. I feel like an old man sometimes, but Facebook/Twitter/Instagram are just too noisy for me. I still read RSS feeds and e-mail newsletters (and books!). I share some things on Twitter but I don’t consume from them regularly.

      Here’s a positive song and message that I just discovered yesterday: https://www.youtube.com/watch?v=FVztZI-OMUg

      Good to be Alive” is a song about gratitude. A song to remind us of the good in the world, on the days when our souls are rocked by all of the bad news that surrounds us. A reminder to be grateful for all we have, at the same time, to tenaciously stand behind things in life that serve the greater good — getting one step closer to a world where EVERYONE can all say “it’s good to be alive today.”?

      • Fantastic song. I’ve never heard of that guy. I’ll have to check out his other stuff. Agreed on social media. I’m the only one in my family who doesn’t have a Facebook account, though I do read one or two twitter feeds from time to time. (on investing and markets… what else?)

  4. Thanks for the great find! I have been overdosing on Buffett/Munger for a while. This includes focusing on the Berkshire Hathaway meeting transcripts – and the ones from before 1999 are impossible to find

    I agree comparing yourself to others is a recipe for disaster.. Yet, it could also be helpful to observe others, in order to see if we are not making any mistakes ( so that we can improve)

    • Agreed, I’ve look for transcripts from older meetings as well, which is why this book was intriguing. These aren’t transcripts, but at $1.99 for the Kindle edition currently, the book is a great deal for the notes and highlights. One thing to note is that the really old meetings were relatively short because so few people attended! Instead of Qwest Arena, you could have shared a coffee shop with Munger and Buffett. Pass the sugar please, Warren!

  5. I really respect Warren Buffett for how he has grown his business and his sage advice. However I also think he suffers from the pains of the Great Depression since he always seems to want more. He is never truly satisfied even though he lives miserly. If you believe him from his HBO documentary he stresses over spending $2 on his breakfast. Also you mentioned how he is giving away money to charity. Note that he is giving away the rest of the money after he dies. He is too afraid to part from it while he is living. He even mentions how the amount he has given away doesn’t affect him. There are so many people that could be benefiting from that money now.

    • Meh, I don’t like the idea of someone telling someone else how to spend their money, let alone how to give it away to charity. Buffett can give it all away if he wants, and he can give it away now or in 10 years or 20 years in my opinion. It’s still a quarter of a trillion dollars.

  6. Tom Martin says:

    It’s too bad the guy mentioned air conditioning as a primal pleasure. The evils of air conditioning would be a nice subject for this blog.

    • Air conditioning is certainly energy intensive, but so are cars and airplanes. It is a technology that we can use to make lives better (not just through comfort, which is definitely the case in the South with 100 degrees/100% humidity, but for industrial purposes and indeed it can save lives), but also something to use efficiently. There are already solar-powered a/c units. Tim Harford just wrote about how A/C changed the world:

      http://www.bbc.com/news/business-39735802

      • Tom Martin says:

        Yes, I’m sure my frustration is aggravated by living in coastal California, where no one really needs it. People move in from a different state and don’t even consider changing their habits. Not only is it very wasteful to not open your windows when it would cool your home quickly but it prevents others from enjoying the very expensive California climate.

        But this insensitivity exists in every state. With the widespread use of A.C. it became too much work to open and close your windows when appropriate. People just let machines do their work for them and gladly pay for new power plants. Worst of all is that A.C. has become a sacred cow – no one can speak out against it. Fortunately California is forcing people to switch to geothermal cooling with their ZNE legislation. But I think it will be a long time before other states learn from us.

        • Tom Martin says:

          To clarify, the ZNE legislation only applies to new home construction. But if it works here my hope is that others will adopt it. Geothermal cooling has been suppressed too long due to initial construction costs. But those costs are (reportedly) easily recouped over the life of the building.

        • True, we never had air conditioning installed at all when living either in SF Bay Area or Portland, OR. The context of this post is when you’re thinking about how an average person in 2017 can live more “luxuriously” than a billionaire equivalent in 1917. So having the option of air conditioning in 100F/100% humidity weather is one of the ways.

  7. Focused Husbandad says:

    Great post. Funny…I’ve lived this way without the formality of thought you presented here. You are so gifted and giving to have thought of and shared this.

  8. Jonathan, have you set your FI date and amount? I know in the early days of the blog maybe 10 years ago when I started reading you used to talk about the actual FI goal amount etc but I’ve not seen those blog posts recently.

    • That’s a good question, something I’ve been meaning to address in a future post in detail. I’m turning 40 years old in 2018, so that’s a (arbitrary) deadline that I have for several goals.

  9. I had to chuckle that “air conditioning” came right after “nature” in your final statement. 😉 Good article

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