Financial independence advice boils down to increasing income and decreasing expenses. Most advice is heavily weighted on increasing income. This book tips the scale on reducing expenses.
Fisker starts with an allegory of Plato's Cave. In this cave, prisoners have been arranged in a row since childhood. They have neck braces, so they can only look forward. Behind them is a fire, so they can see their own shadows on the wall. The prisoner's world is just shadows - they think they are the shadows and their friends are shadows. One prisoner breaks free and sees the world outside. He comes back and tries to convince his friends to join him. He tells them there's more to the world than just shadows. These prisoners have a hard time believing him and prefer to stay where they are.
Life in the 1st world countries have become like Plato's Cave. Everyone is expected to go to school, get a degree, work 9-5 to afford a mortgage & consume, then retire at an old age. Fisker argues that a lot of effort goes into spending money. Spending becomes a reward for your hard work. On top of it, the harder you work the more you're taxed. Society has encouraged us to become specialists - locking us into a specific job. While being a generalist is useful, it doesn't fit well into the existing system. We're just cogs in one giant machine. Unfortunately, we're such efficient cogs that our production is amazing. With large production comes large marketing and large consuming.
We have a choice to stop over-consuming. If you stop, you can afford to retire at a much earlier age. Fisker managed to drop his expenses to 10k-12k/year. After 5 years of work as a post-doc, he saved enough money to retire.
Fisker presents three pillars:
- Reduce waste and increase efficiency. This lets you live with the same benefits while eliminating spending.
- Have significantly reduced expenses and invest the difference in production.
- Find something meaningful to do besides work.
A society that worships conformity has zero apparent degrees of freedom.
+-----------+-------------+-----------------+
| | tight | loose | // coupling
+-----------+-------------+-----------------+
| linear | salary man | working man |
+-----------+-----------------+-------------+
| nonlinear | businessman | renaissance man |
+-----------+-----------------+-------------+
// organization
Coupling is a measure of a person's dependence on the world. Linearity limits degrees of freedom because of its dependence on steps. A business that sells widgets A and B is less likely to fail than a business that sells widget A and A-extender.
Salary men are specialized wage earners who earn money from one source. They are very dependent on the company they work for. They have very little control over their careers. The working man doesn't collect a salary, his income is uncertain. He usually has an emergency fund. The consumer pattern is still similar to a salary man. The business man also has unreliable income - but is very dependent to his customers and business. He can't just take off at the spur-of-a-moment for a vacation. The renaissance man has a generalized skill set and multiple sources of income. The income may be unreliable, but he's not dependent on a company or customers.
A renaissance man is also known as a universal man, polymath, or jack of all trades. When the term first came into existence, human knowledge was still relatively small so a dedicated person could eventually master different fields of knowledge. Thanks to an immense amount of effort spent on research, it's hard to master even one field. Instead, Fisker argues we should try to become competent in a range of fields. Try to constantly improve what you know and explore new useful areas.
The fields a person should focus fall into seven groups:
- physiological => obtain optimal levels of physical/mental health, know about healthy diets/exercises and maintain them, basic first aid and other emergency knowledge
- economical => learn basics of economics, finance, investing, balancing books
- intellectual => learn to learn, critical analyzing, research skills
- emotional => not waste resources, appraise value, strong character
- social => get to know people outside of profession, learn to sell, network, and politics
- technical => knowledge of services are useful to save money, working understanding of technologies, learn common trades
- ecological => food, growing food, cooking, etc...
When you're learning new skills, it's important to have these goals:
- become less dependent on a single source of income
- become less dependent on a multitude of store services
Here's a short list of suggestions:
- hair cutting
- mending clothes
- cooking
- trading (buying used or swapping)
- public transportation instead of car
- borrow from library instead of purchasing books
- gardening for food
- making simple, non-toxic household agents
- bicycle, motorcycle, or car maintenance
Learning via projects is a great way to start. Just avoid projects that cost money. It's best to work on projects that earn money or projects that are "free" or save money.
Some guidelines:
- reduce wants/needs from marketplace to minimum
- decrease volume/size but increase sophistication of activities/possessions
- measure prosperity by less activity (do fewer useless things)
- work for the purpose of earning money for no more than five years
- avoid generating waste
- use system in your advantage (don't be evil!)
- serve yourself instead of having others serve you
- keep running costs low but pay for value
- maintain health
- build up capital to live as a capitalist
- always have the skills to find a new job just in case
- focus on developing skills rather than passive entertainment
- gain maximum in satisfaction with minimum expenditure of money/energy
They cost money, take up space, require maintenance, and are hard to get rid of. Own things that are needed, durable, and preferably small. Things usually depreciate over time, take this into account. Don't give into buying things you want for pure entertainment - make sure you really need it. Avoid getting new things unless required and get rid of existing things unless required.
The two most important qualities of shelter are location and price. It must be close to your job (if you're working) and a grocery store. Preferably within walking distance so you can give up a car. It must be cheap.
Get durable clothes that's flexible for all occasions. Dress more compatible with the weather to save money on trying to change with the temperature. Learn to mend your clothes. Make your own detergent.
Health is the wealth that matters the most. Stay active and fit. Have a high deductible, low premium health insurance plan and stay fit so we'll only use it for emergencies. F Intermittent fasting prolongs your life. Learn to cook your own food. Learn which meals can be made cheap and healthy. Optimize your ingredients.
Minimize the distance you need to travel. Cars should be for recreational use. Use them on weekends for tours and use your feet for weekdays. If you must have a car, learn how to maintain/repair it yourself. Cars are depreciating assets, buy one to get your from point A to B (never as a status symbol!)
What's "necessary" in modern times weren't available just a few decades ago. Do you really need the TV, cell phone, and other services you pay for? Evaluate them to save some extra money. Getting rid of TV also has the benefit of getting additional time. TV prevents people from learning. Instead, workers just vegetate in front of it after a full day of work.
Some services to think about:
- television
- cell phone
- internet
- credit cards
- insurance (low premium, high deductible for emergencies!)
"If I can't identify with a job title, like assistant sales manager, who am I really?"
Radically changing your lifestyle will get some negative criticisms your way. Just ignore it. Don't try to keep up with the jonses.
A lot of people say it'd be easier if they were single. Technically, it's not true. It's easier to have two people earning incomes and sharing a household than trying to do it alone! There's no secret here, just plain old compromise.
The wage earner's cash flow looks like this: stuff -> you -> wage (loops back to stuff)
It can be even worse when introducing debt: stuff -> you -> wage -> debt (loops back to stuff)
To become independent, you'll need to develop an emergency fund because income will become unreliable. You'll also need to spend far less than what you typically spend.
A typical recommended savings rate is 10%. For every 9 years of work, you'll have enough money saved up to cover 1 year of not working. What if you could save 50%? For every 1 year of work, you can cover 1 year of not working. Now tip the scale in the other direction - 80% savings rate. For every 2 years of work, you can take 8 years off. This is how early retirement is reached.
Fisker recommends we learn to invest our money so we can survive on the interest earned from our savings.
When you purchase an item or maintain a monthly/annual expense, try to think of the amount you need saved to cover it. For example, that daily cup of coffee costs ~40/month or ~480/year. Assuming a very conservative 4% interest from your savings:
0.04 * X = 480
X = $12,000
You'll need to save an additional $12,000 for retirement to maintain the $40/mo expense.
Q: I find it hard to believe that anyone can live on $5-7k/year without living in hardship. A: I find it hard to believe how anyone can spend $30,000/year. A simple break-down of the most important expenses where we now live in a fully owned single-family house would be $3900 for real estate taxes; ~$200/month for utilities (water, gas, electricity, internet); $150/month for food (two people); $2000/year for insurance (home, car, health). This comes to about $5000/year/person. All the loose stuff is noise. We don’t have any expensive hobbies. We rarely if ever pay retail prices. The point is that my spending far away from $12,000, $21,000 or $30,000. I’ve spent between $5-7k/year for more than a decade while living in several different situations: being single and married, living in three different countries, in dorms, apartments and house rentals, in an RV and as a home owner. There are many different solutions at this spending level.
Q: How can you possibly pay for health insurance on a total budget of $500/month? I pay $500 per month on health insurance alone, so your budget does not make sense. A: Getting affordable health care is a piece of cake in each and every other developed country in the world. You have to figure out how on your own and preferably before you get sick! Possibly workarounds include medical tourism, the use of urgent care facilities where applicable (not emergency room), and a healthy lifestyle since 2/3 of US health care costs are due to self-inflicted and poor lifestyle choices.
Q: I couldn’t see myself living in a RV if that’s what [ERE] takes. A: So, obviously, you don’t have to live in an RV to retire extremely early. This was already clear to me before buying the RV having lived in three different countries in anything from house rentals, apartments, and dorm rooms before that at a similar level of expenses. Ironically, after initially disparaging RV-living as “too extreme”, many other bloggers have subsequently discovered how fun it is to live in an RV, at least for a while, but please don’t think that this is the only way or the least expensive way for that matter.
Q: How do I find a way to live cheaply in an RV. I looked at some campgrounds and they seem rather expensive?! A: Forget about campgrounds. You need to focus on mobile home parks. Many of them cater to long-term RV residents, mostly construction contractors but also second-homes for professionals/commuters and people like you. Unlike tourist campgrounds, these parks aren’t well-advertised on the internet. The best way to find them is either to drive around or even better, to use google satellite to spot them from the air. Once you find one, talk to the manager. Approach it as if you would a standard rental. Bring references. Be willing to write a check for the deposit. Bring pictures of your RV—they just want to see a well-maintained one; one that’s capable of being driven away if you stop paying rent.
Q: RV living sounds cool. Based on your experience, what would you suggest I get? A: We lived in a 34′ Georgie Boy Encounter. It was a class-A motorhome. The lessons learned from that is that smaller is better and that a travel trailer (TT) is the most economic choice. If you don’t own a truck, figure out how to pay someone to relocate you. A motorhome (class A,B,C) only makes sense if you’re moving constantly. If we had to do it again and desired to move around, we’d aim for a 21-25 foot TT, and pay someone with a truck to relocate us. If we were moving around often, we’d likely go for a canvas wall tent or a van conversion (class B). Another thing to keep in mind is that most RVs are built for short vacations and this affects the design. With few exceptions most RVs have no insulation which means they are too cold during [freezing] winter unless you’re willing to burn a lot of propane or otherwise find workarounds (wear 6 layers of clothes at all times), insulate the pipes, etc. Since the home is on a vehicle, weight is an issue. Slide-outs which offer much more space are really heavy! This means you lose luggage capacity. A “spacious” RV that sleeps 6 might only offer a couple of hundred pounds of luggage per person. An RV w/o slide-outs might offer thousands of pounds. This is all covered in RV books. Read some.
Q: What’s your net worth? A: Currently 121 times what I spend annually. Because I retired with realistic projections (rather than optimistic ones) and because I live a value-producing lifestyle rather than a consumption based one, this number keeps rising. Being this high it mostly fluctuates with my portfolio. This amount will theoretically last the rest of my life with an extremely safety margin. If you don’t understand why investing the equivalent of even 40+ years of expenses will last much longer than 40 years, you need to read up on some basic retirement math or ask a qualified CFP or similar. Also, 121 years (that’s the unit) means I could theoretically increase my spending by 3-4x and likely not run out of money.
Q: How do you deal with all your sacrifices? A: How do you deal with yours? A sacrifice does not mean giving up something. A sacrifice means exchanging something for something better. I have given up shopping, credit cards, expensive cars, large houses, season tickets, and vacations in exchange for the joy of not having to work, the ability to spend all my time as I want, and the lack of stress from never having to struggle to make ends meet. If you know the answer to how you can sacrifice 40 hours of your life a week for the next 40 years, you know the answer to how I can sacrifice not eating out or buying stuff without thinking about the cost.
Q: How much did you pay for that? A: Probably nothing, unless it looks expensive in which case, probably more than you think. I buy luxury items from the “upper class” used and swap and recycle items with the “middle class” for free.
Q: How can you live comfortably on so little money? A: First, I spend my money more than twice as efficiently as the average person. Actually, the true factor is closer to four times as efficiently. This means I get more utility out of each dollar. Second, don’t confuse spending money with living comfortably or having fun. Comfort is mainly about living without constant stress and fun is mainly about what you do rather than what you spend. If you can’t do anything without spending, naturally you wouldn’t have fun and you would probably also be stressed due to this inability. However, it is possible to overcome this inability. Third, when I buy things, I consider the long run. How much I pay for something now does not matter as much as how much it costs in the long run. I consider most of my purchases the way a business would.
Q: How can you retire on less than a million dollars? A: A million dollars is simply what is required to replace the expenses of an average consumer family, about $50,000/year. Now obviously many families live in less than that. Consequently, they need less retirement funds. Conversely, some people can not live on less than $100,000. I can’t even imagine how someone is able to spend that much money—if you gave me 100k and told me to spend it within a year, I’d probably still have 90k left by December despite trying very hard to waste it—but these families would need at least 2 million to retire.
Q: How much did you pay for your degree? A: I grew up in Denmark where advanced education was/is free. If I had grown up in the US I would probably have done the stupid thing and get into student debt because I was still ignorant about money when I was 18. In hindsight, that is, knowing what I know now, I would have either gone to a state university and paid rent to my parents to get a degree in a skilled profession (engineering, accounting, …) or gone to a community college and gotten a degree in a skilled trade. I think the latter is very underrated. This is probably because universities have more money available for advertising than do community colleges even though if you are equally ambitious you will be making as much money with a trade as you will in a profession.
Q: How much did you make while working? A: In my 5 years as a postdoc in the US, I earned $40,000, $41,000, $42,000, $67,000, and $69,000/year before tax. I retired at this point. You don’t need to master software engineering to reach this level of income. You can do it a toll booth operator, a delivery truck driver, or a with a useful college degree, like not art-history. From a financial standpoint I was dumb enough to make it using a PhD and working in academia/government which is probably the most inefficient way to make money for a smart person; but the work was interesting to me at the time.
Q: But with your degree you could earn so much more money… A: Indeed, and if you increased the frequency of your breathing, you could gulp up so much more oxygen. But you don’t because you have all the oxygen you need. Similarly, I have all the money I need and my goal in life is not to spend more money. Compare the situation of having more money than you could ever want to tap water. You likely have access to as much water on tap as you could ever want to drink. If this is the case, why would you want to drink more water? If you understand why you wouldn’t want to drink so much more water, you understand why I don’t want to earn so much more money.
Q: How much did/do you make on the blog? A: After the book has been published, I’ve consistently made $25-35k/year on book sales pre-tax. I’ve been selling about 4000/year every year making about $7/book in royalties before taxes. In comparison, my blogging income has been entirely pathetic, describing a very volatile pattern ranging somewhere between a few hundred bucks per year to a few thousand.
Q: Given my calculations (alexa rankings, SEO rating, etc.) you could/should make much more! A: Easy to say, but hard to do. Several people have told me that if I only pay them a $1000 consulting fee or whatever then they can figure out how to monetize the blog for six figures. My counter offer has always been that I’ll pay them $0 upfront but offer a 50/50 split of whatever profits made beyond, say, $5000/year. Nobody has ever taken me up on that offer. Not a single person! So I don’t give such statements a lot of credibility.
In 2017 one person actually did take me up on that offer. However, they figured on lots of promotion and hoop-jumping and I wasn’t into that. Key point is that it’s not all about quantity. The ERE message is to spend as little as possible. It’s a lot harder to monetize a highly optimized household that spends $10,000 per year than a less optimized household that spends $30,000 per year not to mention those who waste even move. I do not have many readers who spend more than $25,000 per year per household, so for me that’s the upper limit. I use amazon associates, 20% of the spenders account for 80% of the waste and that’s at the $10k/year median. Indeed, I learned that the spouse of a single reader of mine is responsible for 10% of my income! If my reader distribution included more wasteful doctors and engineers, my blog income would be higher. As it is, it’s about 2k/year, so I don’t put much energy into increasing that number.
Q: What about children? Do you plan to have them? I have heard everything from how children leads to a fulfilling life to the opinion that life without children is meaningless. Now, I am the older sibling and when I was a kid my mother was running daycare for another kid eight years younger than me. Based on this experience, I’ve come to the conclusion, that parenting is not for me.
Q: How can someone with children retire early? A: The same way as people without children. By themselves, children actually spend very little money. The frugal problem happens when parents are willing to spend less on themselves but still want to create a consumer lifestyle for their children, usually with the goal to conform. I believe this is doing the children a disfavor. Children need attention which you can either provide yourself for free or pay someone else to provide for you at a cost somewhere between minimum wage and infinity. Early retirement is a great way to provide time and attention and if you’re smart you will wait the 5 years it takes to save enough money to be financially independent before having children.
Q: I think 30 is way too young to be retired! A: Could it be that you’re stuck in the conventional “school-career-retire-die” way of thinking about life? Here retirement is used in the “becoming financially independent and using that freedom to pursue other interests”-sense. If you read biographies of people like Ben Franklin or Joseph Conrad, you will often see that they “retired” from one profession to take up another interest. Being financially independent and also well-rounded and possessing more than one skill made that possible.
Q: How can you be retired if you still make money? A: People used to work in one vocation until they grew old, worn down and nonproductive. Then they would be retired and get a pension. Different generations have different definitions of what retirement means to them. First, the concept of working only one career is outdated. Second, not many will be lucky enough to receive a pension anymore. FI means having enough investments to pay all your expenses for the rest of your life WITHOUT needing to work. If you think of this as saving enough money to start your own trust fund, stipend, or a big annuity for yourself, you got it. This usually means taking up some other activity that is more meaningful to them but which could be hard to make a living from such as raising children, saving the world, rock climbing, making art, open source programming, writing, etc. It doesn’t mean doing nothing. In that regard, some people say that I still work because I have this website. If you want to call that work, fine.
Q: You can not be retired if your spouse is still working. A: Is there a rule that states that either both must be working or both must be retired? I suspect part of the confusion comes about because married couples used to run all their finances jointly. This made sense when there was only one income earner. In our case there were two and we entered marriage with very different levels of wealth. In addition we had different goals. Therefore we kept our finances separate. This avoids a lot of arguments about whether or not to spend on something. We only need to agree on things we buy “for the house” and are free to buy things for ourselves without consulting the spouse.
Q: You’re not retired. You’re just a stay at home spouse. A: The difference between a stay at home spouse and me is that I am independently wealthy and don’t need my spouse’s income. In other words, I am not a “dependent”. I pay half of the household expenses with investment income from money I saved and my wife pays the other half with money she earns from working from her investment income even as she still works.
Q: Isn’t your low budget predicated on you being married and sharing expenses? A: No. I do not spend less money now compared to when I was single although I spend it differently. Our budget is a compromise. We share expenses 50/50 for household expenses but not personal entertainment or personal savings. If we got divorced, I would no longer be paying half of some of these expenses, like the car, and food and heating would also be lower. Conversely, I might be paying more in housing unless I could find a room mate, buy a log-cabin, invest in a condo or a house, or one of many other solutions.
Q: This may work for you, but it would never work for me. A: You might say the same about calculus, reading, walking, or whatever, but is this your problem or mine? I primarily write with the intention of providing guidelines rather than plans. I show you that this could work and give you one specific example of how I made it work. I know there are a few other bloggers who work along similar lines and they do things slightly different from me. What we all have in common are really high savings rates and rather low levels of expenses which in monetary terms would be considered poverty levels or at least be much lower than the money we would be expected to spend to keep up in the spending competition.
Q: If you’re financially independent, why does your book cost money? A: If I may paraphrase Andre Kostolany: When people buy my book, the fact that I receive the proceeds of the sale is secondary to the fact that people are willing to pay money to read my ideas. Now, it used to be vanity thing, but having played around with the price point as well, I’ve realized that the lower the price, the more likely I am to attract random mainstream readers who aren’t yet ready for a heavy dose of advanced lifestyle design. Past experience shows that lowering the bar results in clownish negative reviews about three weeks later. This subsequently depresses the number of not-so-mainstream readers who might pick it up. Thus, the current strategy it to increase the price slowly from two Big Mac Meals to three Big Mac Meals and maybe even higher as ERE gets more popular. If you think that’s too expensive, you either aren’t ready to read it yet or you fail to appreciate how this is not like most other personal finance books that just contains a few good ideas.
Q: Why don’t you donate the proceeds/your money to charity? A: For the same reasons that Warren Buffett held on to his money. I think I can do more good in the long run by using the money to support my own work on ERE than donating it to nonprofit groups where I fear it would just be eaten up by administrative salaries and other inefficiencies. Ultimately I do intend to get rid of all of it before I die but it will require years to find a good cause that’s run equally efficient.
Q: Why don’t you travel more? A: I have traveled quite a bit in my younger days and I no longer find it that interesting. I’m much more interested in learning new skills and sharing them with people than I am in visiting other countries.
Q: Do you have a bucket list? A: Not officially! My goal in life is simply to avoid boredom. However, here are some things that interest me and a few things I have done: Get a PhD. Publish a scientific paper. Become financially independent. Live in a second country. Live in a third country. Live in a fourth country? Visit more than 10 other countries. Become a millionaire. Live in an RV. Live on a boat. Work on Wall Street. Work on/in the space program. Work in a strategic role (security or politics, not business). Learn to sail. Get a HAM radio license. Build a radio. Get my own wiki page. Publish a bestseller. Be published in three separate fields. Build a house. Buy a house. Sell a house. Fix a car. Build a vehicle. Take a trip walking 1000+ miles. Take a trip cycling 2000+ miles. Take a trip sailing 4000+ miles. Climb a mountain (Mt. Fuji). Fly an airplane. Get a black belt in a martial arts. Develop enough skills to live well on less than $7500/year. Less than $5000/year. Less than $2500/year. Become completely self-reliant: $0/year. Live off freelance income. Live off investment income. Live off business income. Live off wage income. Patent an invention. Learn woodworking. Learn metalworking. Ride a motorcycle. Shoot a gun. Build a steam engine. Build an entire machine toolshop. Go to Alaska and build a cabin to live in Proenneke-style. Build a robot. Build a boat. Build a motorcycle. Live forever…
Q: Would you like to be on my radio program/TV show/national newspaper? A: My answer used to be no, but seeing as these ideas are acquiring mainstream traction, my present answer is now “maybe”. Before you contact me, please read the About Me, about ERE, this FAQ, and the wiki about ERE. Alternatively, provide a reference. It’ll go a long way.
Objection: You're obviously a talented person and it's a waste not to use that talent. Answer: Many talented people waste their talents in jobs that serve no purpose other than making useless products intended to end up in a landfill in return for a paycheck in order to buy useless products made by other people doing the same thing.
Objection: Doing everything yourself takes a lot/too much time. Answer: Shopping and calling service professionals takes a lot/too much time too. It takes equally long time to do something yourself as it does to arrange a purchase of the solution. What does take more time is acquiring the skills to do things yourself. About 300 hours are required to become competent (markedly better than a layman) at a given skill. Considering that the average person wastes 3-5 hours per day watching TV, it is possible to acquire 3-5 skills per year instead of watching TV. Over just a decade, this adds up since skills are not forgotten once learned.
Objection: Living on a low amount of money, e.g. $7000/year, is not comfortable. Answer: Looking at it using Maslow's hierarchy of needs starting with shelter/utilities and safety, graduating to friendship, moving on to esteem, and ending with self-actualization, ERE can be very comfortable as it easily provides all of these. However, if comfort is defined as the ability to purchase consumer goods with little regard for the cost, or measuring one's self-esteem through buying/owning such goods, then ERE is not comfortable. The perception of a lack of comfort is thus partially rooted in the consumerist tradition of not thinking about purchases, and living under the assumption that one must buy things in order to solve problems, be entertained, or be comfortable.
Objection: Why not just do something you love [with a passion] for a living? Answer: The problem is that doing something for a living can make it less enjoyable than doing it because you want to. It's similar to how enjoying an ice cream cone from time to time is a treat, whereas an entire diet consisting of nothing but ice cream would eventually be nauseating. If you're truly able to enjoy the doing same thing for the next 30-50 years however, go ahead. ERE simply provides you the freedom to do something else should you lose your passion.
Objection: I don't see myself living the same way as a poor person. Answer: What defines living "rich" or "poor" differs with each culture and generation. No universal definition exists for those terms beyond the concept of poverty that refers to meeting your basic needs. If a person can meet their basic needs, any other external standard is culturally defined. Redefine "rich" in non-consumerist terms.
Objection: If you ever need to go back to work you'll have a hard time since your resume and marketable skills will decay. Answer: ERE frees a person from working endless hours using only one skill, and allows time to learn many skills. More options exist for a person with several marketable skills instead of 10-20 years of experience with only one skill.
Objection: By spending so little, you are hurting the economy and stealing jobs. Answer: Spending money to purchase items you don't need so someone else can have a job producing those unnecessary items is the equivalent of one person digging a hole so the next person can have a job filling in the hole.
Objection: There's no way I could ever give up my {cable TV/sports car/horses/etc.} Answer: For every extra $100 you spend per month, you'll either have to find a substitute or save $40,000 extra to cover the expense. There's no way around that.
Objection: I have kids. Answer: Kids need food, shelter, and adequate clothing. Those items don't add much to household expenses if ERE principles are followed. Other items that are deemed "necessary" are usually culturally defined needs, not actual needs. Study after study shows that kids benefit most from time with their parents (reading, playing games, exercising) more than anything else. Early retirement provides that time.
Objection: Good luck ever finding a mate. Variation: your poor wife! Answer: Live by example, compromise when necessary, and realize that financial problems cause more than half of all divorces.
It is my posit that in 21 days you could be fully underway to retiring from job-income. I expect it will take about 1 year after that to master the essentials. And 5 years of sustained effort to reach the goal.
This requires strength of character and deliberate creative action more than it requires tips, talent, or luck. It is, therefore, much like running a marathon.
There will be no cutting back in this program. Instead things will be cut away completely. It is much easier to deal psychologically with not having access at all compared to having restricted access. Restricted access only serves as a constant reminder of what you are missing. No access on the other hand changes your priorities and values and soon those are seen as the ideal state and your previous state is seen as something undesirable.
Attacking full force on several points leads to synergy. For example, I will be recommending commuting by bicycle. I will also recommend getting in shape to save on heating costs and medical bills. These two fit together and they will fit with others things. If you do one, you get the others for free. If you are only willing to do either one but not all, you will still have to spend time on the other one in some form thus wasting effort. The whole is much greater than the sum of its parts.
The goal here is to cut your expense level to <$10,000/year/adult. I live on $6000/year/adult.
To make the change, you need to do three things:
- Start immediately. The “I’ll go on a diet, starting next year” has never worked. Don’t commit on the spur of the moment, but don’t wait until the excitement has gone away either.
- Make yourself accountable. Different people are motivated by different things. If you honor your word, you can make a public statement.
- No exceptions! No exceptions! No exceptions! Exceptions are self-destructive in so many ways.
I think if there is anything that is holding people back from realizing their dreams, it is living in a place that is too big or too expensive. If the home is too big and mortgaged to the roof, it will make the pursuit of liberty and happiness quite difficult.
I think there is a deliberate choice to make between early retirement and the standard sized house for your “socioeconomic status”. You can have one or the other, but not both. Living in something significantly smaller than what your peers are living in is key to early retirement.
Unless you enjoy spending money on a large home, a home is basically only a place where you sleep and keep your stuff. Realize that you could in principle choose between having no kitchen and paying $300 more per month. Consider that an extra bedroom might add $250 a month to the rent and the interior costs around $50 a month. Those $300 could be spent on eating out every day.
To become financially independent of a $300/month expense requires investments between $90,000 and $120,000. This is the so-called latte-effect at the large scale expect that instead of a daily superfluous cup of luxury coffee, we are talking about a superfluous bed or bathroom that is rarely used. How many years will it take you to save this much more money?
I think that a good guideline per person for living arrangements is $200-300/month/person. In some places this buys more than other places. The number is absolute. If I want to live in a “nicer place” it simply translates into a smaller place and vice versa.
When I started out, I was paying about $275/month for a small room with a sink. This was close to downtown of one of the more expensive cities in the world. When I moved out of that place, I moved into my very own apartment for $400/month. Then I moved together with DW for $330/person/month. We then made the mistake of moving into a house at $700/person/month. That lasted a year with stagnating savings as a result. We currently live at $237/person/month.
On the first day of the challenge, the idea is to seriously consider whether your current living arrangements are optimal for early retirement. I put this on the first day, because it takes about a month to find somewhere else to live and move.
Of course some may be bound by mortgages or not having sufficient ready funds for making a deposit, and they may resort to just considering the move and start looking at a longer time frame.
For the rest, I think there are three things that matter
- Location relative to your work.
- Location relative to your grocery outlet & most visited places
- Cost.
So, the real estate motto is 2/3 true: It’s location-location-cost.
I go to craigslist and click on housing. Then I put in my limits: $200 minimum (because that removes a lot of useless search results) and $350 maximum. If you are two persons, you could put $400-$700. Also consider cohousing, room mates, etc. Also consider radical alternatives. We live in an RV for example. In addition some of the cheaper places may not be heavily advertised. We lived in the same place for 2 years before discovering an option that was $400/month instead of $660/month. Ask around!
What about buying? In that case I would use the same limit for the monthly payment. I do not think it is a good idea to consider the house you live in an “investment” unless you know more about real estate than the average person and in particular enough to speculate on its direction.
I would also not be too tid down to a particular city. A frequent excuse is that “I need to live here”. Actually, unless you can document some need for a particular climate, you only want to live in a particular place. This want, then comes down to paying extra vs retiring early. I pick the latter.
Now that you have a bunch of potential addresses, it is time to find routes to work and groceries respectively. I use google maps. Enter the address of your potential new home and then click on from here and enter you work address. Google maps should give you a route.
Since we are going to get rid of the car tomorrow, I recommend checking to see if those streets are walkable or bikeable. Satellite view at maximum resolution or the street view option is helpful for this.
If you live in a region with heavy winters, you will have to walk rather than ride a bike. In that case limit your maximum distance to 5km (will take about an hour to walk). Walking a 10km round trip daily is certainly doable — I did it for half a year once, but I wouldn’t want to walk much further than that.
An alternative solution is to check out car commutes possibilities or public transport. While these cost money, something which is to be avoided, they may significantly expand your options. In that case use google maps to look for bus stops instead. Even if you are not going to move, try going through the craigslist/google maps exercise anyway just to realize that it is possible.
I bet a lot of you were looking forward to putting your car up for sale today. There will be at least one car gone by the end of the month.
Today I’m going to discuss the management of things, that is, what many of us refer to as “stuff”. It probably holds for most of you, myself included, that you have more stuff than you actually use. By extrapolation, it therefore holds that other people has more stuff than they use as well. The cumulative mountain of unused stuff is a symptom of economic inefficiency. Inefficiency is what will slow you and everyone else down from early retirement or even prevent it.
Typical excuses for keeping stuff:
- I need it. (Answer: Then why haven’t you used it for the past 12 months?)
- I might need it. (Answer: Highly unlikely, since you haven’t used it for the past 12 months.)
- I didn’t know I still had that. (Answer: Roll eyes.)
- This was a gift from aunt Martha. (Answer: How about regifting it aunt Bertha?)
- This antique is worth a lot money. (Answer: Then sell it!)
- I will just hold on to it a little longer. (Answer: How long?)
The main problem here is that people have grown accustomed to acquiring stuff by buying it new from stores and forgotten all the alternatives. As a result, everybody on your street owns a blender that they have used maybe 10 times over the past year. Everybody owns a ladder even though they have only been up on the roof once. Everybody stock a home library and a private movie collection. And everybody owns some kind of crafts/hobby supplies that were fun for about a month but which were then put on hold.
This wasteful activity stops right now.
There is a major untapped resource here though. You might be one of the few people that actually have some desire to own a blender, if only for a short while. Instead of buying it get it for free.
Here’s how to get it for free. Use freecycle.org. Click on the link and see how it works. Then join.
Your task is to find one (or several) of your unused possessions and OFFER it on freecycle. If you do not have a bicycle, your task is to get one for free. Simply post a WANTED ad detailing your desire to get one. Oh, and if someone actually offers you a bicycle be sure to pick it up!
A good definition of unused is anything you have not used for one year. If you have used everything you own for a year, then congratulations. You get a C. Move the time frame back to six months. Still good? You get a B. Move the time frame back to one month. If you’re still good, I have nothing to teach you. You get and A.
You will find that most things show up on freecycle sooner or later. Freecycle will also teach some valuable lessons about lifecycle management. Unless you repeat the stunt of our former neighbors, who put 15 large black trash bags of stuff (clothes, toys, …) out for garbage pickup during the last spring cleaning, you will probably see that getting rid of stuff is a lot harder than acquiring it. We truly live in an affluent society, otherwise people would be knocking down your door to get your superfluous things. However, be patient, sooner or later someone will take it. If not freecycle, then craigslist.
The effects of this exercise is
- Saving other people money.
- Saving yourself money.
- Thinking more deeply about future purchases.
- Needing less storage and fewer bedrooms.
- Having an easier time to move to a new place.
There are basically three big categories in a normal household budget that need to be severely modified to make retiring extremely early feasible. These are housing, transportation, and food.
Whereas I have already dealt with housing, I am still a bit reluctant to deal with transportation. Therefore I’ll start with food.
During my first 3 years, I ate mostly lentil soup (lentils, onion, garlic, cheese, rice, carrots) and tuna sandwiches with lettuce or kale. This accounted for 75% of my cooking and it was certainly healthier than the ramen noodles and cafeteria food my colleagues subsisted on. I would also eat a lot of stir fry (beans, onions, carrots, apples, broccoli, rice).
By keeping to only a few meals, which together cover all bases, it is possible to learn to cook based on a small set of staples (rice, beans, onions). These staples are then bought in 10lbs bags.
Avoid preprocessed food. Personally I draw the line at canned tomatoes and bread. I would never buy sauces, powders, or frozen ready meals.
One will get used to eating just a few different kinds of meals surprisingly quickly and be as happy about eating as someone who eats out all the time. The great thing about this is that being invited somewhere for their regular dinner is a real treat. Those who eat a standard diet require much more to be happy about eating something they don’t usually eat. Of course if gourmet food is your thing, then maybe food is the area where one should spend a little extra effort or time (and maybe even money). Meals can be varied by adding loss leaders as the supermarket offers them up.
Many have way too many kitchen gadgets. See this post on how to reduce your kitchen to something more useful without having to dig for everything.
Before switching to a staples based dinner plan, I recommend getting rid of all the weird things in your cupboard. The best way is to not buy anything until your last strange ingredient is gone. Just imagine that there was an earth quake and the stores were closed for a week. How would you do?
I highly recommend flipping the standard western idea of basing all meals on milk and meat around. Consider going vegetarian. It is much less expensive both in terms of food cost but also in terms of reduced medical costs (cholesterol and all that). Also it is very hard to stay overweight on a vegetarian diet. The emphasis on carbs also results in more energy. In addition, short of not having children, going vegetarian is the most effective way of reducing your impact on the world’s food supply. Incidentally do not throw away leftovers. It is wasteful and in light of the above also morally wrong. Besides, leftovers without meat tend to store longer.
One way of not buying too much unneeded food is to strictly adhere to a grocery list. This is not optimal though. Using a list leads people to buy food even when it is not on sale. Anyway, a much better trick is to shop on foot. That means bringing a backpack and walking over to the supermarket instead of driving.
I have always managed to live within a thirty minute walk from the nearest one, and chances are that you do too. You are now limited by the size of your backpack.
Incidentally you can bike too depending on what kind of load you can handle on a bike. I was always set up to handle more on foot (about 20kg) than on the bike (about 10kg).
Food limit: Depending on where you live: $50-75/person/month.
There was a time, when people were able to make detailed advanced plans to meet their appointment to do a certain thing at a certain time. For instance, several people would schedule to meet at a certain time and place and they would all manage to do so. Or, say, a person could be given a list of groceries to pick up and the person would pick up the groceries. All this worked on a combination of small pieces of note paper and the ability to follow instructions.
Today, cell phones have replaced these skills. In fact cell phones are now considered a need and have even begun to replace basic parenting as some parents are beginning to use cell phone tracking to keep track of their kids.
In fact, phones are not really needed. For years I relied on email and now I have skype for talking. Data access is a need since I do use it for work, volunteering, writing the book, writing a blog, etc. but cell phones would merely be a nice to have feature. I would therefore suggest dropping it altogether. Alternatively, if you must, get a cell phone with a prepaid plan and wait to use it until you break your leg. Surely telling someone that you just saw a cute bunny rabbit on the street could wait until, say, next year. And please do try to get back to that whole “setting up appointments to meet”-deal.
Is your cell phone worth it? This is easy to answer. Multiply your monthly bill with 300. Then divide this with your monthly savings rate. This is the number of months, that your cell phone is keeping you from retiring e.g. If your bill is $50 and your monthly savings is $500, then your cell phone is delaying your retirement by 50×300/500=30 months or almost three years For the geeks, the 300 comes from the principal 4% annual withdrawal rate, hence 12/0.04=300.
There is a safety concern when it comes to being out of communication range so to speak. The way to get around this is to make detailed plans, tell someone where you are going and when you will arrive, and make sure that someone sends out a “rescue team” if you’re not heard from with X hours. In addition, never get “stuck” anywhere where you depend on reaching your destination in a certain time “or else”. This would include heading out in the cold in clothes that is not warm enough or heading out in the heat without water, and so on. I think cell phones creates a certain risk management hazard in that they encourage the lack of contingency planning and common sense as well as an “I got my cell phone – if anything goes wrong, I’ll just call”-mentality. There are basically two schools of risk management. The first school says that risks can be managed if one adheres to strict procedures. The second says that risks can not be managed because there is always some unknown unknowns that were not accounted for and that the best risk management is not to take chances and remain flexible. I belong to the latter school.
Hobbies can be classified into three groups. Most hobbies belong in the first group and that can be detrimental. The challenge is therefore to move into the second group and maybe eventually even into the third group.
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From the time I was 12 until I was 24 I spent practically all my money on enjoying the bleeding edge of computing. I upgraded my system every two years or so and so I have owned more than 10 computers. I have also spent money on cameras, hifi equipment, telescopes, outdoor equipment, fantasy knives, and so on. Many other people spend their money on partying every weekend or going out to eat. In the end we all have the same to show for it: Nothing. We have been entertained, but I honestly put the value of the entertainment I received 5 years ago close to nothing. On the other hand, the investments I made 5 years ago give me almost unlimited freedom today. When I decided to become financially independent, I realized that that habit had to be replaced with something else.
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Enter the “free hobbies”. There are also hobbies that cost nothing or are in a sense close to price neutral. Learn Ancient Greek, play chess, start a vegetable garden. It is not hard to find free hobbies and in general it is possible to develop an interest in almost anything. The reason is that things are mostly uninteresting simply due to a lack of understanding of the hobby. Now, it is possible to remain at the free-passive state forever, but it is also possible to go further and I highly recommend it. This leads me to stage 3.
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Giving back. What I mean by this is to engage with other people. My interest in system administration meant that I got to run the department servers where I worked. My interest in geopolitics actually lead to a contribution to a book. I am definitely quite proud to be published in two different fields — not many people do that anymore. I also volunteered for the third rail of sustainability (overpopulation).
Once you develop a passion for something that is free and maybe even rewarding, not necessarily strictly remuneratively, it is unlikely that you will have time to buy things because you are bored. It is also immensely more satisfying than shopping. It might even possible to turn it into a career.
Find something that is highly meaningful to you and which does not cost a lot of money to engage in, and you will be a lot happier than the rats in the rat race.
What is your current hobby costing you in years? Multiply your monthly outlay by 25 and divide by your monthly savings rate. E.g. if you save $1200 a month and spend $120 on your hobby, it is costing you 3 years! If you only save $300 a month, your $120/month hobby is costing you 10 years! I trust you to run your own numbers.
The most effective option to save money on clothing is not to buy any, hence this is what I would recommend.
This strategy can work for several years because most people, simply have way too much clothing e.g. more than what we can wear at one time. If you have clothes you can not wear at all, get rid of it. Someone else can probably use it.
Now, your average piece of clothing should survive the laundry cycle about 100 times. If you have 10 shirts, that’s 1000 cycles. Even if you only wear them once before you wash them, that’s three years. This should be sufficient to get well on the way towards financial independence. Some people have even more years worth than that. Consider that many things can happen during this time. You might change your size or the clothes might go out of fashion. Having less clothes makes it easier to keep up with current trends if you are into that sort of thing. It also means that you can get a new piece more often. This follows from Lanchester’s square law, also applicable to tank warfare.
For the rest of us, I highly recommend sticking with “classical bland”, this means either gray or navy for the guys. For the girls like with most things, it’s more complicated.
To make clothing last longer, you should seriously consider doing laundry less often than that as it wears down the fiber. One way to wash less often is to change clothes appropriate to the task.
You should also learn how to mend holes. I think that pieces that are not directly visible, socks, underwear, anything that goes under the top layer basically should be mended, patches, etc. until it disintegrates. You can pursue the same strategy with towels and bedsheets. For instance, if you only use one towel, it lasts about 4 years. If you only use one bed sheet, it lasts about 3 years before it rips.
Now, suppose after 2-3 years that you actually did run out of pants. I would get underwear and socks new, but everything I would get used. Start with freecycle, then move up to thrift stores, and then move on to extreme sales events at outlet stores.
Now it may be that you work somewhere were you have to look expensively dressed because someone in corporate thinks it increases your productivity or inspires customer confidence. This often requires paying the part. Again, look for sales, but do not feel too bad about this one: You won’t need those clothes in retirement, therefore they do not delay your retirement by the standard calculation other than making your savings rate smaller. They do not enter on the factor 300 numerator though.
Everyone needs to live somewhere, but not everyone needs to drive somewhere, especially not those that found a place to live that is close to work on day 1. Next to housing cost, transportation costs are the second biggest source of expenses. The average American spends 18% on his income on transportation.
That is 0.18×12=2.1 months a year of work. That is a lot of time that could conceivably be used for something better.
Assume he also spends an hour daily in his car commuting, then that is 250 hours a year, assuming 250 working days. That is 1/8 of the working day on top of the working day. Hence, that is 12/8 = 1.5 month in addition.
In other words almost 3 months a year goes into being able to drive back and forth from work. Hence if you would otherwise calculate 6 years until retirement, then if you own a car, you will only be able to save 9/12 as much, so your time until retirement would extend by 12/9*6=8 years or two additional years. Correspondingly, if you calculate 12 years until retirement, then you are really looking at 16, or four more years. Conversely, if you were otherwise looking at 16 years, then giving up the car will reduce your “sentence” to 12 years.
Not owning a car is therefore an extremely helpful measure towards early retirement. If you want to retire extremely early, it is almost a prerequisite.
Not owning a car comes with other benefits. First you will save money on exercise. Driving your car over to a gym to run at a treadmill and then drive back again is inefficient at best. If you ran or at least walked or biked to and from work not only would you save the money for the car. You would also save the money for the gym. I know that many people past college age completely ignore their level of fitness. It seems like a degree and a career also serves as a ticket downhill the path of physical decline. Naturally if you are going to retire early, it will be sad to sit on the couch all day due to lack of “energy”. C ommuting under your own labor is a great way to avoid this.
I would consider it normal to, without preparation and prior training other than your daily commute, to be able to run 10 miles, walk 30 miles, and bike 50 miles. Yet many think these numbers sound insane. This suggests a large chasm in terms of frame of mind between a driver that gets around using gasoline and a walker, a runner, or a rider that get around under his own power.
Walkers easily go 4 miles by foot. Drivers get in their cars to get from one side of the parking lot to the other.
So this is directed to those who are still attached to their cars. Once you get off of your addiction, you will find that it is easy to go without it too. Yeah, I don’t know how I manage live without being addicted to cigarettes, but I actually feel pretty good about it. As with all things the most trouble usually comes when you try to do things the new way by thinking in the old way, e.g. “it is so hard to walk 2 miles to the supermarket because I need a cup of cream for this recipe and I don’t have any” – what a terrible life to live. You will automatically plan ahead for these things so the problem will never appear. Conversely, a walker in the city will not have to stand and wait 15 minutes for a bus that is going to move him 10 blocks.
But what about the children. They need to live close enough to their school so they can ride a bike or walk or take the bus. Good habits are best started early. Consider a trailer bike. Consider walking them to school or at least to the bus. When I was a kid I lived 2 miles from my school, and my mom walked me back and forth for the first year. When you are retired, you will have time for this — it is a meaningful thing to do!
At least better than working for more years so you can drive them back and forth in a van.
Now, if you are good with cars or motorcycles, there is an alternative. It is possible that you may buy “fixer-uppers” and resell them to recover most of your transportation costs. This is an enviable position to be in. For most of us, we will have to get a bike or take the bus.
Car ownership has at least the following costs:
- Depreciation, leasing, or debt servicing costs. Leasing or debt servicing costs are relevant if you do not own your car outright. If you own your car outright and you intend to replace it, depreciation costs become relevant. For instance, $12000 for a car that lasts 10 years comes to $100 a month. That requires $30,000 in extra savings.
- Gasoline and insurance. These are unavoidable if you want to drive your car anywhere.
- Opportunity costs from sitting behind the wheel when you could be exercising.
- Health costs or lack of energy from lack of exercise.
- Buying into an unsustainable model. Oil is not going to last forever.
- Green house gas emissions. Global warming is now considered a virtual certainty and it is considered extremely likely that humans are a contributing factor. The implications of global warming are enormous.
I’m talking about finding something that motivates you: Perhaps your calling, what you were meant to do if you did not have to go to work every day to support your … uh … lifestyle.
The problem with our society is that we have basically been conditioned and programmed by marketeers to equate pointless consumption with rewards or entitlements after hard work. It is simply the only sanctioned way feeling good. This can easily go to such an extreme that the preferred way of feeling good about oneself involves buying some needless stuff. To pay it off, consumers go to work the next day to manufacture stuff for the next consumer that comes along and needs to feel good. This is the very definition of a consumer driven economy. It has little other purpose than building things for people to buy things so they will keep working.
The conclusion is obvious. If you want to stop working, stop behaving like a consumer.
I find the most engaging hobbies to be the ones that create value for others. Writing this blog is a hobby of mine and presumably it creates enough value for others to read it. The time I use to write, and respond to comments and emails is time I don’t spend shopping. Hence, when filling all one’s spare time with meaningful pursuits takes away all the time one would otherwise spend spending money.
A frequent lament though is the lack of time and energy to pursue a high intensity hobby. It is sad when work sucks so much out of so many people’s soul that they have no energy to do anything else. If anything this is the death spiral of the consumer economy. People work hard, consequentially they have no energy and thus they do the easy thing: They shop, watch TV, and eat junk food. This takes away their money and leaves them without money as well as the mental or spiritual energy that would flow from being engaged in something important. Bad food and lack of strenuous physical exertion also atrophies the body and makes it sick.
Start finding something you can identify instead of work. This is psychologically very important and it is one of the things that took me the longest to find out myself. Anyway, when somebody asks you “what do you do?”, answer with your hobby. If you don’t have a hobby or a calling (which may be your job) answer, you are still a drone — I am a middle manager. If this is not the case, start identifying with something else and spend a few hours a day doing it. People in a consumer driven society generally identify with how they earn and how they spend. Rarely do you see anyone identifying with what they do outside of work or by what they believe in.
I see no need for detailed budgets or tracking expenses. In my world there are basically two categories:
- Money I spend
- Money I keep
There is to me no discernible difference in terms of how I spend the money, whether I pay by credit card or whether I pay by cash. Spending is by and large a rational process so I have and offer no tricks or tips in the sense of whether using credit, debit, notes, or coins only, changes spending behavior.
If all other sources and possibilities to solve my problem have been exhausted and I absolutely have to buy something to solve it (failure!), I look on the price and calculate what my depreciation cost is. For example, I will look at the cost of buying and try to estimate the return from selling and divide the difference by the amount of use I intend to get out of it. This process will yield different numbers for different products. Then I pick the lowest number.
These numbers for all my expenses should be seen in relation to category 2, the money I keep. The money I keep quickly turns into investments, that is, productive factors that pay me.
In other words, when I see $100,000 in category 2 money, I don’t see it the same way as category 1 money. $100,000 in savings/investments means an income of $4,000/year, hence translated mentally, $100k means $4k/year.
Conversely, $4k/year means $100k. Alternative, $4k/month means $1200k. Having that amount translates into a money stream and this money stream is equivalent to a salary in the sense of a job: except I don’t have to work for it.
All category 1 expenses are therefore seen in terms of how large a principal I must accumulate to have them paid by interest from the money I keep.
Money I keep, therefore, represents freedom. I value this very highly. To compare this to the spending category, I estimate the monthly cost of spending on some item, and then multiply it by 300.
It is quite possibly that it is this enormous multiplier, the factor 300, that discourages people from saving for passive income. Saving $30000, after all, “only” results in 100 bucks a month and saving $30000 can take years or even decades when one is not aggressive about it. In that sense not-saving creates a double-whammy. Conversely, being fanatical about saving also works the other way, e.g. I’m paid a little over $30 an hour for freelancing. This means that if I can save $9000, it means I don’t have to work for an hour each month. Once that is cleared, I start saving for the next hour of liberty.
Hence, if I want to purchase something that will cost me $5 a month, I do not see a $5 price tag. I see that category 2 needs to be boosted by $1500. Suddenly $5 does not seem so trivial anymore. On the other hand, paying $4000 for something that I can sell for $3500 and that will last for 15 years … that is only $2.7 a month.
This means that price tags become irrelevant. All that matters is monthly expenses and the size of the principal. I always try to decrease the former and increase the latter. When they meet, you have arrived.
The only thing that matters to your net worth are assets that can easily generate income. Sum up the total of these categories:
- All savings accounts and checking accounts.
- All brokerage accounts.
- All real estate you own that you rent out. If any are mortgaged, subtract the debt.
Do not include the following:
- Any kind of tax-deferred/locked retirement account.
- The house you live in.
- Cars, boats, airplanes, or other big ticket items (unless you rent them out).
- Bling-bling.
Now compute your expenses level. If you are a home-owner that does not own your home, the mortgage payment is an expense. If you own-own your home, your expense level should be lower.
If you have any kind of pension coming in, subtract that number from your total expenses.
Calculate your annual expenses. Multiply your expenses by 25. Is it lower than your net worth? If yes, congratulations, you are financially independent and you can go for a few decades without a job. Now multiply your expenses by 35. Do you still qualify? If yes, then historically, you could go on forever.
If either is a no, then you still have work to do, literally. Work hard to maximize your networth while minimizing your expenses. For most people the latter is far easier since the leverage factor is in the hundreds e.g. $100 saved per month translates into $30000 less in retirement requirements.
… and all the other usual suspects: friends, family, loved ones, colleagues, ...
On day 2, I recommended getting rid of a lot of your unused stuff, that is, stuff you haven’t used for the past 1 months. The point of that operation was to make it easy to move into smaller as recommended on day 1 and thus remove the main cost of having too much stuff namely, indirect housing costs.
Whereas the above may be thought of as an inventory reduction, the next step is to take inventory management to the next step, to something akin to the Japanese Just-In-Time except what we’re going to do here is to store some or our things “off-site”.
I suppose you’re familiar with the idea of borrowing things from your neighbors. But have you ever systematically done so? Set up a system so that each person provides a list of what they have but do not use every day. This could be tools, kitchen utensils, DVDs, and even bicycles.
These lists are shared and then people borrow from each other following the standard rules of borrowing:
- If you break it, you replace it.
- Return it in a better or as good as condition as you got it in.
If you don’t feel like making lists, you can do “intermediate scale freecycling” locally. Reserve a table at work for things you no longer need and put up a sign that says “free” and put things you are willing to give away there including weird ingredients, paperbacks, etc. Maybe others will get the point and the idea will take off.
The last option is to lend things out on a semi-permanent basis e.g. give things away with the caveat that you can recall them if you ever feel like it.
It goes without saying that the first and the last method requires some upstanding friends. Normally this will develop automatically. People who do not respect the system and other people’s things will eventually get excluded from the system.
It is vital to the early retirement plan to be able to access savings in your retirement.
Having implemented all changes of the makeover so far, it should be possible to save at least $500/month… more if you’re making more than minimum wage ($12000/year). Those ambitious enough to retire extremely early should be able to save more as well as earn more.
Initially, it is important to stay motivated. I wrote a post last year on how to compare your savings to big ticket items on a regular basis to stay motivated. To wit, being able to buy something worth $10,000 makes one happy on a daily basis, or at least as often as one thinks about it, whereas buying it will only create happiness for a few weeks.
It matters very little whether your saving is done in a savings account, a checking account, a money market, or even under the mattress. As long as your cash position is less than $10,000, the difference in interest rates is minute. Besides, keeping a non-working cash position is useless for early retirement. The so-called emergency fund is only useful for workers who live above or close to their means, but for extreme early retirement you live at less than half your means. In a short while we’ll start building a position in a brokerage account. This will be accessible to be liquidated in case of any “emergency”.