Early Retirement Extreme by Jacob Lund
For the last couple of days I have been reading the book "Early Retirement Extreme" by Jacob Lund Fisker.
Jacob (a fellow Dane) cut his expenses to a quarter of his salary (at the time USD 50,000 a year) and retired after 5 years of working.
Jacob also seems to have created the concept of "early retirement". Obviously it's not a new concept at all, it just means that your capital and assets provide you with enough passive income to cover your expenses indefinitely allowing you to work or not work at your leisure.
This is also more commonly known as being financially independent, but "early retirement" just sounds better and pisses more people off for some reason (it seems to stir emotions more).
Your savings rate is more imporatant than your salary
A common misconception today is that the requisite level of capital can only be reached by winning the lottery, having an exceptionally high income in the 1 percent bracket or selling a company etc.
Jacob proved that you can do this fairly easily by cutting your expenses, not buying stuff you don't need and being smart about where you live so you don't need a car.
Admittedly the word "extreme" does belong in the title. Jacob cut his expenses down to an extreme level and I think that his approach will prove too hard for most people.
Aristotle don't like extremes
In my opinion almost all things taken to extremes are bad. Eating too little will kill you and eating too much will make you fat.
Being too rash is foolhardy and being too timid is cowardly etc. (Aristotle wrote a whole book about the golden mean being conducive to the good life: "Nicomachean Ethics").
Also not having certain experiences at a young age means that the opportunity to do so is lost forver (travelling around the world at age 25 is not the same experience as doing it at age 40 etc.)
So I like to think of Jacob as a top athlete in the sport of frugal living (which happens to make you rich very fast if you earn a median wage or above that).
I also don't acutally want to live, eat, take roids and train like Arnold Schwarzenegger did when he won the Mr. Olympia, but I do want to look muscular, be healthy and feel great. So I take a page out of Arnold's book and work out with heavy weightlifting in a much more moderate approach.
And I feel the same way about Jacob's lifestyle. After all most of the benefits are located at the start and from there it's diminishing returns. In the sport of weightlifting this is known as "beginner's gains" and you can have these easily too in the sport of "frugal living" even if you don't want to live like Jacob (downsize house or cars - 80/20 rule).
Be smart about spending your money
The foundational premise of "Early Retirement Extreme" is that you can lead a normal middle class life for a fraction of the cost that most people pay and this will free up time from having to work to pay for them. The things that you'll give up doesn't add any durable life happiness anyway.
I agree with this. A cheap car will get you from A to B in the same amount of time as an expensive luxury car. The difference is the amount of time that you'll have to work to pay for either and the opportunity cost of investing the capital instead (if you take out a car loan you'll be paying negative interest, so you just fucked over your future self).
Obviously whether or not to get a luxury car would depend on your financial goals and net worth. If financial independence is your goal you should probably never get one unless you can pay cash and it's only a tiny fraction of your total net worth.
Maximizing value and minimizing cost
In the end Jacob looks at it as maximizing "value" and minimizing "price" in your budget.
It's also what Warren Buffett tries to do in the stock market: "Price is what you pay, value is what you get".
So USD 70,000 (and running costs, oportunity cost of capital etc.) is what you pay for a luxury SUV but what is the value (and utility) of the vehicle to you? (and what is your motivation for buying it - most of the time it's a perception of social status).
Technology has seen to it that we all have an abundance of everything that we could possibly need and therefore are wasting most of our surplus money on stuff that we don't need.
After all if you're in the middle class today you can live more comfortably and safely than Rockefeller could despite being the richest man in the world at the time or even the Roman Emperor in ancient times.
Technology is your friend
Rockefeller couldn't buy the medical health care, safety in automobiles, insulation of his home, internet connection etc.
Emperor Nero the famous tyrant had a habit of using ice to cool his drinks, this was considered a magnificent waste of resources ("The Annals" by Tacitus) and a symbol of his luxury. You can just grab an ice cube from the ice dispenser in the fridge, it's no big deal - thanks technology.
So productivity has increased maybe four fold or so but the amount of time we work is the same.
80 percent of all people don't need to work on farms to feed the nation, so we've come up with all sorts of weird bureaucracies, services and new wants for people to work in supplying and to spend their money on.
As long as GDP per capita is growing at a healthy clip (1,5 - 2 percent) the next generation will be much better off in terms of productivity (maybe robots and self-driving cars will be the next wave).
So in the rich Western world we're getting paid a salary like we need to spend money with reckless abandon as in have a fancy big house, two luxury vehicles for two drivers to commute to different work places (SUV anyone?), private schools, shifting wardrobe fashions, expensive whisky, the latest iphone etc.
You can reduce the cost of most of these items without actually going without it. You can buy a house that is smaller and at a cheaper location near work so you can make do with only one car (and buy a cheaper car). You can buy an older version of the iphone even though you can afford the new one many times over.
Your savings rate and investments are key to wealth
It's just the age old game of reducing your expenses to well below your income so that you can get rich the old school way of spending much less than you earn.
It's how Rockefeller, Arnold Schwarzenegger (he was a dollar millionaire before getting his first movie role) and Warren Buffett started out.
A big pile of money invested in financial or other assets can make money much faster than you can selling your time at work from eight to five - compound interest will see to that.
So reading Jacob's book will shine the spotlight on your own expensive habits and motivations for having this or that.
It'll show you that you do in fact live like a king and that there's ample room to reduce expenses even if you don't aspire to financial independence or optimal living. Jacob will provide you with inspiration and some tools to get started.
As a side benefit often saving money also increases your health. Walking or using a bike saves money and increases your health, so does not picking up candy and twinkies at the supermarket and eating less expensive food.
So it's a double whammy, it'll make your future self richer and healthier. Also not worrying about money reduces stress.
But I'm too old and set in my ways? It's never too late these days, statistically you'll live a very long and active life.
Also teaching your kids how to fish (spend much less than they earn and invest) is much better than handing them fish until you tip over and die. Habit is a powerful thing and monkey see, monkey do.