May 22, 2017

An Extreme Strategy For Getting Ahead On Minimum Wage

Just getting by can be a huge challenge when your income is low. But there are things you can do to get ahead.

By Hazel Garcia

12 Ways To Spring Clean Your Finances

What Will You Sacrifice To Gain Your Dream Life?

The question of whether or not we need a $15 minimum wage has been a hot button political issue for many years. But here at InvestmentZen we’re not interested in debating policy issues – we’d rather leave that to people much smarter than ourselves. However, we are fascinated by individuals like Jacob from Early Retirement Extreme.

Jacob was a nuclear astrophysicist who retired early and lives a simple, happy life on only $7,000 a year.

He’s part of a growing tribe who have escaped the rat race through minimalism and simple living. They eliminate big expenses and what many of us consider necessities, in order to spend their time mastering new skills and doing interesting things.

With that in mind, we thought it would be interesting to take a closer look at Jacob’s strategy for how minimum wage earners can build enough wealth to live a rich life (and even escape the rat race)…despite the considerable challenges involved.

We also want to be clear that the intention here is not to diminish the challenges faced by individuals living on the poverty line (see this infographic that highlights just a small fraction of those challenges). Obviously everyone’s situation is different – this plan works for those with a lot of flexibility (you’re young, able-bodied, and don’t have kids). If you’re supporting a family on a single income or taking care of an ill family member, your circumstances might make some of these steps impossible.

how you can build wealth on minimum wage infographic

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The U.S. federal minimum wage is $7.25 per hour*

$7.25 x 2000 hours = $14,500/year

– $385 (approximate taxes owed)

= $14,115/year.

What Is Wealth?

Wealth =/= mansions and private jets.

You can own mansions and private jets and still be broke.

Instead, we define being wealthy as:

“Having enough money to cover all expenses for a long time”

After all, the best part about being wealth is not having to worry about paying the bills.

If you make minimum wage, you can still get wealthy by changing your lifestyle.

“The difference between spending $6,000 vs spending $20,000 generally comes down to spending money extremely deliberately vs. just spending it.”

Jacob, Early Retirement Extreme

1. Move to an affordable city

You can’t get wealthy on minimum wage if you live in New York City or San Francisco

Instead, move to one of the 10 most affordable cities in the US:

Common Excuses
Most people complain about high cost of rent and groceries, but they refuse to consider moving to a cheaper part of the country.

“I love living here”

“I like my job”

“All my friends and family live here”.

But you can’t make minimum wage, live in an expensive city, AND be wealthy. You can make excuses, or you can do something about it. It’s your choice to make.

2. Find a place to live that costs less than $600 in rent per month

$600 a month is more than enough to cover the median monthly rent in an affordable city.

Tips:

Try to get utilities included (water, heat, electricity)
Split living expenses with someone

Remember: Saving just $50/month is $600/year.

Annual cost: $7200

Remaining: $6915

3. Eliminate your commute

Getting rid of your average commute will save you $6935 per year!

38 miles round trip x IRS driving cost estimate of $.51 per mile = $19 / day in commuting costs.

Instead of commuting:

Sell your car
Buy a used bike
Move within biking distance of work

Annual cost: $0

Remaining: $6915

4. Cancel your cable

A standard cable subscription can easily cost close to one grand a year!

Instead:

Get an antenna and watch free broadcast channels.

Get an annual netflix subscription ($95.88)

Better yet, stop watching TV and go outside!

Annual cost: $400 (including internet)

Remaining: $6,515

5. Don’t eat out

..unless you absolutely must e.g. dinner with the boss

Instead:

Learn to cook. Spices are your friend.
Buy food in bulk when it’s on sale.
Only eat vegetables in season.
Consider only eating meat 1-2 times a week.

If you follow these rules: your food costs should be less than $75 a month, or $900 a year.

Interesting fact: Elon Musk once lived on less than $1 a day, just so he could go after lofty goals knowing if he went broke, he would be fine.

Annual cost: $900

Remaining: $5,615

6. Don’t Skip Health Insurance

It can save you money in the short term, but can also bankrupt you.

Instead, choose a high deductible plan.

Annual cost: $1,704 (average cost after tax credit).

Remaining: $3,911

7. Shop at the thrift store & mend holes instead of throwing clothes out

Annual cost: $100

Remaining: $3,811

8. Rediscover the fact that a lot of the best things in life are free.

You don’t need to spend money to have fun:

Have a picnic in a public park
Play sports at the community center
Go for a bike ride
Read at your local public library
Play old board games
Learn DIY skills on youtube
Start a blog
Take a hike
Do yoga outdoors
Call an old friend

Annual cost: $0

Remaining: $3,811

9. Invest your remaining money

After covering expenses, we’re left with:

$3,811

Here’s how to spend it to build wealth:

Pay off all credit cards (if any).
Establish 6 month emergency fund.
Open a retirement account and buy low-fee Vanguard funds

10. Invest in yourself

Spend your free time:

Upgrading your job skills (e.g. trade school, community college)
Learn to make money on the side (e.g. driver for uber, sell furniture on craiglist)

If you increase your earnings to a modest $32,000 a year, you could become financially independent within just 10 years.

Year	Total savings	Passive income*	Expenses
1	$22,563.84	$867.84	$10,304
2	$46,030.23	$1,770.39	$10,304
3	$70,435.28	$2,709.05	$10,304
4	$95,816.53	$3,685.25	$10,304
5	$122,213.04	$4,700.50	$10,304
6	$149,665.40	$5,756.36	$10,304
7	$178,215.85	$6,854.46	$10,304
8	$207,908.33	$7,996.47	$10,304
9	$238,788.50	$9,184.17	$10,304
10	$270,903.88	$10,419.38	$10,304

*Assuming a 4% inflation adjusted return

*As of Dec 2016

Remember, getting wealthy is a series of choices you make. Getting wealthy if you’re earning minimum wage is not easy, but if you’re ready this, you can make it happen.