Before I started saving for financial independence, I would save up money on the order of a $1000–2000 and then blow it all on gadgets bringing my savings back down close to zero.

I would think up new hobbies just so I could spend many hours researching and reading consumer reports on which camera or computer system to buy, which accessories I should get for my system. I probably spent more time contemplating the equipment before I bought it than I did using it later.

My name is Jacob and I’m a gadget-o-holic.

My initial solution along with many holics was complete abstinence. From that point on, all hobbies were to be free to avoid the excitement of making big plans just to excuse the later acquisition which was the real driving force behind the plan.

Eventually I mellowed out. Instead of insisting that all hobbies must be free, I now try to enforce bootstrapping. This means that I am allowed to purchase equipment only insofar that using it can return a value corresponding to the money I spent or am going to spend.

This means that hobby expenses need not be zero if there is a corresponding revenue in terms of money saved or earned. The hobby must not operate at a net loss on the income statement.

This excludes many hobbies which are only intended to burn through money with no valuable return. Yet it leaves some hobbies with the potential to earn money or simply eliminate an existing expense.

Originally posted 2010-09-05 11:10:45.

Most people (especially financial planners and pf bloggers) make the idea of retirement savings much too complicated talking about index funds, 401ks, and compound returns. Many people blank out and simply follow the well-intended advice without questioning these experts. However, it is really not that difficult.

The quintessence of saving is to spend the money while not working. Thus if you work for a month and save half your income, you can take the next month off. That should be obvious. So …

If you save 5% if your income, you can take 1 year off every time you work 19 years.

If you save 10% of your income, you can take 1 year off every time you work 9 years.

If you save 20% of your income, you can take 1 year off every time you work 4 years.

If you save 30% of your income, you can take 1 year off every time you work 2 years and 4 months.

If you save 40% of your income, you can take 1 year off every time you work 1 years and 6 months.

If you save 50% of your income, you can take 1 year off every time you work 1 year.

If you save 60% of your income, you can take 1 year and 6 months off every time you work 1 year.

If you save 70% of your income, you can take 2 years and 4 months off every time you work 1 year.

If you save 80% of your income, you can take 4 years off every time you work 1 year.

If you save 90% of your income, you can take 9 years off every time you work 1 year.

Interesting, indeed! Of course normal retirement plans use savings rates less than 20% and depend on something called the “magic of compound interest”. Now there is nothing magic about compound interest, which is simply exponential growth, but there certainly is a great deal of magic associated with determining the input parameters of investment returns and inflation. These input parameters, particularly when extrapolated over large time intervals (anything more than 10 years), crucially determine the end results.

Now this kind of magic is good in theory, but sometimes it is difficult to implement in practice. Capital assets (aka tools, incidentally, you should really click on that link and read that post if you have not done so already) will give superior returns if but only if the assets are purchased at a good price and only if the assets actually improve efficiency. It is easy to find examples of investments that were purchased for much more than their worth (are you paying too much for the in my opinion totally overhyped index funds? You probably are. How do you know? If the P/E of the index is higher than 18, 1.5 times the generational average, you definitely are! Currently, the value is around 17 which corresponds to an earnings yield of 5.8%. This means that future returns are not going to be as impressive as historical returns. Another problem is the reigning economical philosophy. What is the purpose of a company? Is it only to maximize shareholder value? The shareholders certainly think so. But what about the company’s effect on the workers, the consumers and the nation as a whole. If those values change, returns will change.

Therefore you gotta ask yourself a question: How much of your retirement strategy is based on things, like your savings rate, which you can control, and how much of your strategy is based on things, like the future return and inflation rates, which nobody know and which are out of your control?

Originally posted 2008-09-11 06:53:16.

When delving into a new endeavor (house owner, car, sport, computer, … ) it is often recommended to buy a “beginner” version or a “starter unit”. The idea, as it goes, is to see if one is “really” into this new activity before committing a lot of money. Now, ab initio this sounds a good idea, except that it is an expensive thing regardless. There should be better ways to figure this out. The best way I have found is to start with units that cost time or commitment rather than money.

For instance, it very common to decide to get in shape and then order/buy some (cheap) exercise gadget. However, poor equipment rarely brings satisfaction. Instead what I do is to set a trigger in the form of commitment. For exercise, I would say, do not buy anything until you can run 5k straight, do 10 pull ups or 20 push ups or whatever you consider reasonable. This should be something that will take a month’s work to accomplish. After that point I would say commitment has been demonstrated and a purchase can be made.

At this point I would buy the best equipment I could ever see myself using. For instance, with the bicycle, there would be little difference for me between buying a $3000 bike and a $1500 bike. Even if I had a million bucks, I would not have the skills and strength to take advantage of the $3000 bike. The difference between a $750 bike and a $1500 bike would be equipment limited though. Therefore I would get the $1500 bike as the first bike although if you are only going to use it sporadically, I would consider needs vs wants and go a cheaper one, like this $1.38 mountain bike.

This avoids the upgrade malaise as there is no need to replace existing equipment with something better. It is simply not possible when you already own the best. This strategy has saved my thousands. Yes, so I’m wearing shoes that cost more than $200. However, these are very old shoes, so annual costs are closer to $20. Also, 10 year old $200 shoes look better than new $20 shoes any day.

It takes quite a while to replace one’s possessions with the best. Money has to be saved and also one has to wait until the old things wear out (or maybe that’s just me). After a decade, though, one will end up with a collection of really nice stuff.

There is less use of resources which is an added benefit.

Even better, should one decide to sell it, it tends to have a fairly high used price. For the very best, the used price is actually higher than the new price for a corresponding new item. This is true for HiFi equipment for instance.

See also “on minimizing depreciation expenses”

Originally posted 2008-07-27 15:23:40.

With a name like early retirement (extreme) I get a lot of inquires about how many millions one needs to become financially independent. A brief search in the personal finance blogging world reveals several bloggers that are aiming for the millions. Not this guy.

The idea that you need to be a millionaire is predicated on having enough investments to draw a retirement income of $40,000-$80,000. Studies based on long term market behavior show that one can draw down 4% of the principal and expect it to last 30-40 years if heavily invested in stocks. 3% would last a lot longer. Divide $40,000 with 0.04 are you get 1 million. $80,000 a year requires 2 million and there you have it.

However, I think time can be spent much better than working 15-25 years to accumulate millions of dollars. If you do like I do you can enjoy a $40,000 lifestyle for $11,000 instead. How is this possible? The answer is VERY SIMPLE.

Instead of buying everything as soon as I want it e.g. red peppers at $1.75, I wait and instead cook other dishes that don’t require red peppers. At some point the peppers will be on sale for $0.50 and then I cook dishes with red peppers with gusto . That’s 71% off or the difference between $40,000 a year and $11,000 a year.

Here’s another example. We recently got a fax/answering machine/telephone for $25. It took three weeks to find it, but if we had gone down to office max or ordered it on amazon, one of similar quality would have cost more than $100. So that’s 75% off for the same thing. Of course sometimes it’s less easy. We have been looking for a queen sized bed for under $200 for quite a while now. We got our present California king for $150 and sold the head board for $75 later for a net outlay of $75. What did you pay for your bed?

One may argue that it is not true financial independence to have to research one’s purchases, engage in comparative shopping, and then wait around for weeks. This takes time and effort. One has to be careful with the money and this is not what true financial independence is about, right? However, my counterpoint would be that if one has to spend 25 of the best years to save $2,000,000 just to avoid having to learn about quality/durability, bargain hunting, and how to be patient, then that is not exactly independence either.

Originally posted 2008-02-18 07:22:01.

When financial independence is a priority, it is very helpful to develop an idea of how much money one needs to support a particular expense. Consider a daily $1 cup of coffee. That is $360 a year. With the canonical 4% withdrawal rate, one would need to save and invest $360/0.04 = $9000 to support the $1 cup of coffee/day lifestyle.

Why pay that much when you can make a better coffee yourself?

What about food expenses? These can range from less than $50/month per person to more than $500/month per person.

Required savings for $50/month:

$50/month = $600/year food expenses. This needs $600/0.04 = $15000 in savings. Whereas $500/month = $6000/year needs $150000 in savings. That’s a lot!

Aiming for the lower figure of $15000 is doable in a foreseeable number of years. After saving $15000 one NEVER needs to worry about food again. One is financially independent of the food expenses.

My suggestion is to tackle recurrent expenses in this way one by one. How much does it take to become financially independent of food, housing, clothing, transport, health costs, internet, movies, cable, …

This results in a set of smaller goals to work towards. It will also create a certain discipline. More importantly, it will make one reevaluate whether the expense is really worth it. For instance, is a daily cup of $4 coffee really something one would want to save $36000 to support or is a 25c homemade cup of coffee good enough?

A 25c/day coffee addiction costs a mere $900 for a lifetime “subscription”.

Originally posted 2007-12-05 00:47:00.

This is a guest post from retired@33, who got in contact with me last week offering to write a post about his story. (He’s new to blogging, so be nice!) It’s hard to estimate how many extreme early retirees there are since not everybody has a book or a website, but I bet there are more than you think; only 1 in maybe 2000 write books. You can contact him at retired33 dot 9 at gmail dot com or comment below.

Like an index fund, I don’t try to pick winners with my stock investments. I buy stocks in varied sectors of the economy so that my portfolio performance roughly mirrors the performance of the total U.S. stock market. And I try to minimize my trading costs. I also tend to avoid dividend earning stocks because my dividend returns are often taxed at a higher rate than long-term capital gains. I don’t buy foreign stocks because there are often adverse tax consequences and I have less confidence in the long term prospects for private capital in countries where there is more cultural/political hostility to it. The other major reason I was able to retire so quickly is that I borrow cheap money wherever I can and invest it. Borrowing on margin from the broker and borrowing cheap money from credit cards has massively improved my return on my net assets. I have to maintain 30% equity in my margin account. So I can effectively borrow $2 for every $1 I own or borrow from elsewhere. My broker is currently charging 1 1/2% interest which means I can expect to make 5.5% in real earnings on every dollar borrowed. So $100 in assets lets me expect to make ($7+$5.50+$5.50) $18 in real return per year. You can easily see from this example how leverage can dramatically reduce the amount you need to retire. Indeed if you can borrow enough money at 1 1/2% you can retire without any net assets. I currently have about $700,000 invested, but net assets of only $100,000. Of course, if it was all invested in the stock market my expected earnings would allow far more spending than I actually do and be far riskier than necessary. So most of the $700,000 is currently invested in “junk” bond or long corporate bond ETFs. This balances the goal of growing my assets over time with the goal of avoiding unnecessary risk so that my portfolio can survive stock market volatility like that which happened in 2008. I monitor the optimum balance between stocks and bonds frequently using measures such as the Required Percentage Stock Market Return necessary to maintain the real value of my assets after expenses (this goes down as I move from bonds to stocks) and the Maximum Percentage Stock Market Loss that I can tolerate and still have a viable retirement (this goes up when I move from stocks to bonds). I realize that this approach is risky as I might have to work again if the stock market performs poorly. But a risk-free portfolio would push the retirement horizon back very significantly. When I retired at 33, with $110,000 in net assets, I felt that my retirement had a 60% chance of being successful in terms of me not needing to work again. My net assets have varied from $140,000 to -$20,000 since I’ve been retired, but because of the availability of cheap money to borrow the viability of my retirement has always looked better than 50%. I’d guess it’s currently 75% likely to succeed. One of my investment strategy rules is to front-load risk & return so that my assets should accumulate over time ahead of inflation so that the risk of needing to work again will decline over time as I move into safer investments. This rule also means that if the retirement fails it is more likely to do so soon rather than in the future. This is a good thing because I’d prefer to look for work in my forties than my seventies if I do need to work again.

In a sense we’re earning our freedom from work by bearing financial risk and forgoing consumption. The more risk we’re willing to bear and the more consumption we’re willing to forgo the quicker we can retire. There’s a lot to be said for realizing goals quickly so that we can learn whether the goals were worth pursuing in the first place. There’s a big risk that if we put off being work-free for twenty years to be more financially secure that we’ll have conditioned ourselves to defer our satisfaction into the future, and won’t know how to be satisfied when we retire. We should also be clear about what “financial risk” means. All I’m risking by retiring on a risk bearing portfolio is having to work again. But if I put off retirement twenty years so that I can retire on a safe portfolio, I’ve already suffered the burden of work that I’m trying to avoid with my safe portfolio.

I’ve never regretted my decision to retire. It removed the main source of stress in my life and has allowed my attention to explore life much more freely. I’ve found myself playing tennis daily and eating better food. I have more time to be with the people I love, I’ve also been able to explore my spiritual path in a more comprehensive way.

Recently I’ve started to do a form of spiritual teaching, called nondual dialogue, with individuals and groups. I love doing this and it could become a significant source of income in the future, but it’s great to feel absolutely no pressure to make that happen.

Originally posted 2010-11-29 11:09:29.

A lot of the disagreement comes about because there are different players in the stock market.

1) Traders who seek capital gains on their shares.
2) Investors who seek return on their money from businesses.
3) Owners who seek control over companies.

The market is a combination of these types. The efficient market theory is the idea that the second group determines all the prices.
(This is not always true. For example, during periods of euphoria, the market is clearly dominated by traders.)

Diversification is the idea that since it is impossible to determine which student in the class will get the highest grades, or which athlete will run faster, or which analyst better understands a business of the economy, it’s better to bet on the average.

Nondiversification/concentration is the idea that students who outperform have certain observable characteristics in common.

Asset allocation is diversification expanded to include more classes. Since asset allocation is becoming more popular, asset classes have started moving together just like most stocks in indexes now move together.

This market efficiency actually makes business inefficient.

Any strategy or edge (alpha) will eventually negate itself and turn into pure volatility (beta) as it becomes more widely applied. This means that to outperform you need either better vision (ideas) or better execution (don’t do stupid things) than average.

There’s probably a lot of money to be made on the failures of human psychology as long as you don’t have as many of those yourself.

Originally posted 2010-10-08 15:38:00.

It is really quite simple.

1. Entropy increases (the only way to decrease entropy is to expand the borders to include other systems with less entropy, got that?).
2. To keep profiting in an entropic environment, complexity must increase.
3. The current solution for increasing complexity is connectivity. (Another solution is becoming more educated, but that is incompatible with the old-think specialized training that the current system promotes).
4. Increased connectivity makes entities non-independent.
5. Risk models of massive systems all rely on the central limit theorem which says that uncertain is distributed as a Gaussian. Unfortunately, the central limit theorem assumes that all events are independent.
6. Central limit theorem based models are thus failing. The unpredicted events are black swans.

Since we have a system build on institutional inertia that is “understood” and “run” by people with limited understanding, the system is going to create more and more black swans. It is essentially a “feature” of a failed design. Humans have created a system that nobody understands. Perhaps more accurately, humans have created a system in which the kinds of persons that rise to positions of leadership also lack the qualities of understanding exactly what they are leading—if you really understood exactly what you were in charge of, would you want to be in charge in the first place? Maybe self-delusion is what makes positions of power bearable?

Two solutions must be implemented:

1. Complexity MUST NO LONGER be achieved by interconnectivity. Differentiation by outsourcing is downright crazy when the outsourcing is limited to a contract and a phone call.
   Let me repeat that. It is INSANE! If you are a business, you will someday find that your supply chains get disrupted for reasons beyond your control. You will also find that these disruptions hurt all players and that you can not simply find another supplier. You are, in short, screwed. If you are a person, who has outsourced basic living tasks *shakes head*, you will find someday that you
   have created an entity comprising you AND “your helper” that can not be separated without pain. You have become interdependent. You will be the only source of money for your assistant, who will be kept at the “technician level”. Your assistant will be the only one knowing how to run the very basics, that is, the foundations of your life. Again, you figure, you are safe because you can always find another, but you can’t; because few things are independent anymore. Never outsource “your legs”!
2. We need a substantially better risk model than what they teach at so-called top universities. The financial crisis is partially to blame on grads from the same universities thinking the same way and failing in the same way DESPITE their fine models assuming that they come from different institutions and think in uncorrelated ways (yeah, right, they probably got each other on speed dial). First, decision makers need a refresher in the difference between precision and accuracy. Precision is useless without accuracy, in fact it is worse than useless because it instills a false sense of confidence. Second, people must learn to think. A new model must be qualitative in nature. The first thing to do after killing all the lawyers is to kill all the quantitative guys.

Obviously, this is not going to happen. Complex systems built on interconnectivity must therefore collapse. How this happens will be the subject of a future paper, although recently you could watch in real time in a limited part of the economy (finance, consumer credit, real estate, and homebuilders)

Originally posted 2009-07-27 00:34:28.

This is an interesting challenge which I believe I could do if I had to. To reiterate: This posts shows what I would do. As always, I am not you, and it is your responsibility to decide whether you want to and whether you need to hire a certified financial professional to consult before following any of the ideas listed here.

Let me define four terms first:

• Wealthy means having enough money to cover all expenses for a long time.
• Rich means having a large income.
• Poor means having a small income.
• Broke means not having enough money to cover all expenses for a long time.

It is possible to be rich and broke for instance. Consider a guy with a Porsche who does not have enough money to put gas in the tank. It is also possible to be poor but wealthy. Although being poor excludes living in a mansion and having a spendthrift lifestyle, the virtue of being wealthy is that one never has to worry about paying the bills. The only thing to worry about is getting the bills in the first place.

Currently the Federal minimum wage is $5.85 per hour. It is scheduled to increase to $6.55 per hour on July 24th 2008 and to $7.25 per hour on July 24th 2009. Here I will just use the $5.85 number. I will also assume a standard work year of 2000 hours which results in a wage income of $11,700. Using a tax estimator from one of the nation-wide tax companies, the taxes on this amount is estimated to be just under $300 or 2.50%. This leaves us $11,400 to work with.

Now it is obvious that with an income like that, it does not make much financial sense to live in New York or California or other extremely high cost of living areas. I think this is the main mistake many people make. They complain about the high cost of groceries, the high cost of gas, and the high cost of rent, but they would not even consider moving to a cheaper part of the country. The explanations run from “I like it here” over “I like my job” to “All my friends and family live here”. The thing to realize is that if you are paid a minimum wage AND you want to be wealthy, you simply can not afford to live in a particular place just because you like it or want it. You have to make a choice: Which do you want more? To be wealthy and not worry about whether the next paycheck covers all your bills or to live somewhere you like keeping in mind that even if you move, you would probably get to like that place too? Nobody can make that choice for you but yourself.

Assuming that the choice is to become wealthy. The first step is to move into a place that includes at least some utilities (heat, water, garbage, or electricity) and costs less than $500 in rent per month. You can get some decent places in the midwest in that range. It is important to pick an home within walking distance of your job. The greater your ability to walk, the more flexibility to you have. In my opinion a person ought to be able to walk 2 miles back and forth to work each day, but why not aim for 4 miles? It is also nice to pick a place which is fairly close to a supermarket, but not as important as being close to work since you won’t be going shopping that often. In terms of living arrangements the second suggestion is to live with someone else that also brings in an income and then split the rent. Try to be flexible. A one bed-room apartment will work for two people. One could sleep in the living room. Again, it is a choice you make. Another thing to keep in mind is to shop around. If you can save $50 on rent a month, that is $600 a year.

Now let’s assume you find a one bedroom apartment for $400 / month with no one to split the expenses with. That’s $4800 a year. This leaves $6,600.

There will probably be some utilities on top of that. My guess is that they will come around to no more than $1000 if you save diligently on whatever is not included in the rent. For instance, turn appliances or lights off whenever they are not in use, turn the thermostat down (ours is set at 64F during winter and 76F during summer). The leaves $5,600.

If you have a car, sell it. If you really need a car for yourself at some point, you can rent one or get a cab. Otherwise walk. I would recommend start looking about for a used bicycle. That should cost no more than $50. For grocery shopping I would get a used back pack. The old army webbing system, I forget what it’s called, works well and can be had for less than $50 at a surplus store.

It goes without saying that if you do get a TV, it will be broadcast only. A standard cable subscription can easily cost close to one grand a year! If you feel like splurging on connectivity, choose between basic cable (sometimes you have to ask for the “basic” basic) and a dial-up internet. In this case I would pick the net connection.

Food can be radically simplified. Don’t eat out unless you absolutely have to e.g. dinner with your boss and the rare birthday party. A few times a year tops. Buy most things in bulk: Toilet paper, 20lbs bags of potatoes, 10lbs bags of onions, 25-50lbs bags of rice, 15lbs bags of beans. Only eat the vegetables of the season – yes, vegetables are seasonal, although they can still be bought out of season they are much more expensive. Consider only eating meat once or twice a week. Skip the milk. Learn how to cook. I used to live on this while I was saving for retirement. Food should cost no more than $50 a month or $600 a year if you follow these rules.

You are now down to $5000.

I would not go without health insurance. Skipping health insurance and then developing a medical problem causes a lot of bankruptcies. However, on this financial plan you will be saving a lot of money which should allow you to have a fairly high deductible. Of course it is also important to stay healthy. Eating like above and walking to work every day should keep you free from a lot of obesity related diseases. The cost of health insurance will probably be in the $500-$1000 range a year.

In terms of clothing, shop at thrift stores, mend holes, wear it out. The annual costs are trivial!

This leaves you $4000 with all points covered. Did I forget anything?

Here is how I would prioritize it:

1. Pay off all credit cards (if any). There are many methods such as debt snowballing. The specifics do not matter as much as throwing all the cash you have at this serious problem in order to get rid of it ASAP.
2. Establish an emergency fund. Some people would advise you to do this first rather than paying off the cards. However, if you are paying off your cards, it means that they are no longer maxed to the limit. This in turn mean that you can put emergencies on credit. The reason for this priority is that your emergency fund earns about 4% in interest whereas paying off your credit cards saves maybe 20%. The size of this emergency fund should be several months of living expenses. I prefer 6 months, some people prefer 12 months, but you should not make it less than 3 months. Your monthly living expense here is $617, so 6 months equals $3700 and it should take about a year to save that amount.
3. Once this is done open a retirement account and start saving a fixed amount every month. This does not need to be a large amount in the beginning. If I was in this situation, I would actually consider taxable accounts as well since they can be used to boost your income because the funds are not locked down until you reach 59+ years of age. Regardless, if you have come this far, it is time to start looking into real investments.

A final suggestion is of course to spend some of the time you would otherwise be spending watching TV or “hanging out” to improve your skills and education so as to earn more than the minimum wage. I realize that individual situations are different. In fact a majority of people who earn minimum wage are high school students that flip burgers which makes this “guide” useless for a majority of minimum wage earners. However, my main point with this post was to show that despite a low income, it is still possible to become wealthy if wealth is truly something you want.

If you earn more, e.g. $30,000 after tax, which is possible in many low-skilled jobs requiring only 2 year education/training, you can implement the 5 year plan. If you start young enough, you could become financially independent at 25 like these guys.

Originally posted 2008-01-02 07:44:45.

Economics can be defined as the distribution of resources between people. An economy can be divided into three sectors: The for-profit or private sector, the government or public sector, and the non-profit sector. These can roughly be described as follows

• The private sector strives to maximize profits to owners. This is done by increasing revenue and reducing costs. The operational model for this sector is the (free) market, where money generally flows to the most productive. Hence, management is chosen by the market in the sense that non-performing managers eventually go bankrupt or are fired by the owners, that is, shareholders for publicly traded companies and owners for privately held companies.
• The public sector derives its income from taxation of the private sector and provides public services (for everybody) such as policing, infrastructure, firefighting, and military protection, which the private sector apparently can not supply at a profit.
  The operational model for this sector is representative democracy. Here managers try to persuade consumers that their management model is superior to that of their competitors and thus they should go out and vote. These advertising campaigns that are repeated every four years.
• The non-profit sector derives its income from grants and donations from the public sector and the private sector. The non-profit sector provides services that are not provided by the private sector or the public sector, that is, services that are not profitable and/or mainly focuses on serving a minority of the public, like the poor, and thus do not fall under public services. Here managers compete for money by writing proposals and asking for donations/begging.

It is apparent that many political opinions can be classified on the emphasis or desired reliance that is placed on these three sectors of the economy. Sometimes political opinion follows personal inclinations. Strongly individualistic persons focus on the private, the for-profit companies, as it allows them the greatest benefits to thrive. Social or group-oriented persons focus on the public, the city, and national values. And the non-profit sector dealing with universally human values like education, religion, and health.

From this perspective, it becomes fairly clear, at least to me, that any economic system that concentrates on just one sector is bound to make some people unhappy and thus unproductive. A viable system would thus have all three sectors represented. We do in fact see that the countries that focus exclusively on one system whether it be for-profit or public (I am not aware of any countries that operate based on a dominant non-profit sectors) tend to score low when considering a wide band of indicators.

Originally posted 2009-06-25 00:05:06.

Dollar cost averaging index investing is the most frequently one-size-fits all strategy suggested by personal finance bloggers. There are many reasons. It is easy to follow. It promotes discipline. It is supported by Nobel Prize winners(*). And perhaps most conveniently, everybody else supports it, so you don’t have to think about justifying it further(**).

(*) Pop-quiz: Name a couple of Nobel prize winners whose fund failed resulting in systemic problems that had to be bailed out.

I have questioned this collective wisdomherd behavior behind index investing before (here, here, and here). The problem is that index investing basically attempts to free-ride on institutional, mutual, and pension funds (larger drivers of the equity market) which naturally have their own agendas.

(**) Yikes!!!

There is a problem in perception as well. Anyone who buy stocks often fancy themselves investors,. Yet buying regularly with no concept of valuation is not investing anymore than sitting in your car while making engine sounds with your voice is driving. Such “investing” is simply saving. In that sense dollar cost averaging maybe be considered a form of saving denominated in the productive capacity of the country rather than in its currency, where the currency is nothing but a claim on its production. In other words, the choice is simply made in terms of saving in future products or future productive factors.
This savings-over-investments mentality creates a demographic problem. The boomer generation certainly supported the run up in stocks their most productive years in the 1980s and 1990s. Now, their retirement turns the previous tailwind into a headwind as they all pull their money out of the market about as fast as they put it in.

I commend either way. Savings is good! But don’t call it what it is not. Investing is the process of spending savings to purchase something of value to increase future returns. For individuals, this is not done by buying a broad basket whether it be productive factors or products. It is not done by buying at any price. What kind of deal is that anyway, say, going into a supermarket and buying a bit of everything in proportion to what everybody else is buying. Is that a deal? Think about it. Who benefits if the mass of people follows this advice? Yup, that’s right, the supermarket, not you.

It is easy to see why this would fail to provide superior returns. Businessweek recently wrote an article that summarized how buying and holding the market for the long run often required some staggeringly long runs. Here are some numbers for the longest periods during which the market was lagging inflation:

• U.S 16 years (1905-1920)
• Britain 22 years (1900-1921)
• France 53 years (1900-1952)
• Germany 55 years (1900-1955)
• Japan 51 years (1900-1950)
• Italy 73 years (1906-1978)

That is a long run indeed. So, you may argue that these periods have been selected. Of course they have. You can however find other periods at later times, even recent in your lifetime, that span decades. A span comparable to a normal person’s “investment career”.

But what about dollar cost averaging? Dollar cost averaging is a sword that cuts both ways. If you DCA in a market that first goes down and then goes up again to close at the starting price, you benefitted. If you DCA in a market that first goes up and then goes down again to close at the starting price, you lost. Dollar cost averaging is not supplying any free lunch to anyone. It only spreads risk equitably. Consider that there are probably a comparable number of people dollar cost averaging out of the market, namely those retiring who need a certain amount each month. Why would one group benefit from another(*)?

(*) If they did in any predictable fashion there would have been someone to arbitrage this gain out already.

In conclusion: DCA, buy and hold, and index investing are all good, but they are not a silver bullet. They are going to make you richer than your peers if you stick to them, but it is not due to their superior strategic virtues. Rather it is due to the discipline which you have and others do not. If you want to produce superior returns, you have to provide some kind of value. If you have buy shares when they are cheap and sell when they are expensive (trivial in theory, hard in practice). You have to provide liquidity when the market is starved and accept liquidity when nobody wants it. You have to take risk, when everybody is risk averse and be afraid when everybody is complacent. TANSTAAFL!

Much thanks goes to DK for contributing to the “coffee fund”!

Originally posted 2008-11-26 06:28:36.

This is a guest post from Hein Viermann. A freegan in his early 30s, who lives in Germany and wants to get out of the corporate career system. He invests mainly in real estate/rentals.

I was born in 1978 and I’m on the brink of retiring (extremely) early. As I started to be critical towards consumerism early in my life, and embraced freeganism, simple living and childfree life style. All these are definitely not part of the German mainstream, and especially not of the corporate, career-oriented, bourgeois, and wealthy people life styles. An early retiree is a relatively rare species, I suppose, because a lot of old money to inherit faded away in the 20th century wars, and more important, because the welfare state gives a minimum (“ALG2″) of monthly benefits of 345 € + simple housing costs (up to 360 €) + health insurance ( about 140 €) to every needy German citizen as well as to certain categories of residents. (Families get somewhat less per head.) This means that instead of early retirement from your own income, you can become a state-sponsored bum with the equivalent of — let’s say — 800 €. (Most people, who collect their ALG2 are not bums, but honestly willing to work. But that is another problem.) Of course, for many this would mean a low social status, and being chased around by the authorities to potential employers, or worse, to training courses and internships. The logic of the system is that a jobless should have the habit of regular presence at a workplace, or school, or at least the employment agency. It should also keep people from using ALG2 as a basic income and have disposable time to earn a premium on the gray, or black labor market. Many, especially in the big cities, are quite sophisticated in keeping the interventions of that agency into their life to a minimum, but risks and insecurity remain. There might be cuts to your ALG2 to bring you in line with the system. You can stay on welfare indefinitely, with the minor change of institution from the unemployment agency to the welfare agency at around age 60. You are only eligible to those benefits, if you cannot be supported by your spouse, or live from your savings, or other possessions. You may still own a modest house (only common in rural areas), but in practice the average ALG2 recipient has a low or negative net worth. There is also little incentive to save, because after saving too much you are not eligible for ALG2 anymore.

I’m starting with all this welfare state theory, because it partially explains the rarity of [financially independent and] early retiring Germans with a good education and a good career start. Those, who’d rather have just a basic income being free of work or studies never have to start moving the hamster wheel. And the ambitious might have enough ambitions for many years of studies and some decades of career. I’m one of the (relatively) ambitious, but I’m seeing more and more clearly, that too much work would likely end up in my estate becoming too big to draw down in retirement. The big majority can invest their surplus incomes in vacations (most people have more than 25 days of paid leave per year), cars (Mercedes and BMW are almost standard cars nowadays), and family (Germany has world-record child and ex-spouse support after divorce, and every second marriage or so will be divorced). I’m lucky enough to have few monetary needs. Energy prices are high here, but food is relatively cheap, and I like to freegan in addition. It’s possible to survive for 500 € per month in most small university towns, or even in Leipzig or Berlin (not in Munich), if your health insurance is paid in addition to the 1/2k, and if you are ready to share an apartment with somebody. It is very common – even for older singles. Compulsory minimum health insurance for an average non-working single is about 140 €. It does not apply to certain groups of people who might have to pay much more, because they are not allowed to the public system, but to the gross majority. Therefore I will concentrate on that number.

As you can see, living simply but comfortably is possible for less than the welfare state bum income. In addition, being outside the state-sponsored class of the poor, you might loose special benefits and discounts such as discounted public transport, or state sponsored lawyer bills. There is no need in Germany to start university, or work in order to retire early! It’s even counterproductive, because the more uneducated you are, the higher the chance, that the job market has no need for your skills.

Let’s get back to the ambitious I. Don’t think now, that I regret having finished university and working my ass off in different jobs. No, I find little pleasure in being poor, even if it’s luxury version of poverty. I like to be wealthy, but I don’t like to take part in the silly game of consumerism. Wegwerfgesellschaft — throw-away society, is a nice German word for it. Basically, I just have to find the right moment to reduce speed, or pull the brake. I may also say, that I do not enjoy following orders, or contributing to an institution of consumerism with my work. I don’t like that I have to fit in socially in the workplace, that I’m dependent on my bosses taste, that I can not freely express myself. I may have to take part in office consumerism: contributing to silly birthday presents for co-workers, eating out at a restaurant with colleagues, being dressed appropriately, no freeganing in the cafeteria… I may refuse, but then again, that’s not good for my [career] integration. Work (doing things) is ok, but the repressive social environment is nothing I want to recommend. Most workplaces have some of it. I don’t want to waste years by working more than what sustains me through my life. I accept that you cannot plan perfectly to avoid leaving any inheritance, but one shouldn’t go overboard in accumulating money. I want my life for myself — I guess that’s fair.

So I might retire this year, or next year, or at 35. I might semi-retire. I might take up another job, if it pays well, and gives room for self-expression. Most compatible to German social state would be a small part-time employment, because it reduces the cost of health insurance. With a job of — let’s say — 500 € per month I have my insurance for about 40 € per month (about 8 % of your income), while paying about 140 € without being employed. And if I keep paying into the state pension fund, and if I do so until the official retirement age (65, 67, …tbc) I will have a small pension which determines my health insurance cost — maybe I’ll get insured for 30 € then! Without a state pension and an almost full record of paying into the state pension system, I would have to take the 140 € insurance (still acceptable). Anyway, reforms are planned by the governing parties.

For a college graduate in Germany, it should be possible to have a monthly net salary of 2000 €. This involves compromises about the kind of work, overhours, idiots as bosses and co-workers, and it’s not going to work without some serious dedication to the whole silly game. The health insurance is then already paid. It is roughly 8 % of the gross salary, so your are paying about 270 € (plus about 250 € from the employer in addition to what’s in your gross salary). A saving rate of 75 % is therefore possible. Engineers or computer kids may have higher salaries and saving rates.
I will have few fellow Germans to share my ERE strategy. But foreigners are invited to check out, whether ERE in Germany might be an option for them.

Pros:

• cheap real estate (both rental and for sale) in economically and demographically challenged areas, while infrastructure is good and life quality is high (small studio for 25k is possible in Berlin or a room for 200 € rent)
• examples: Berlin, Leipzig (smaller, but very inspiring city, 500,000), Greifswald (university city near the Baltic Sea, 50,000), Witzenhausen (university town with organic agriculture studies, 16,000, nice hillside)
• affordable compulsory public health insurance (140 € per month)
• swimming, hiking, cycling, canoeing possible in many places
• good hitchhiking infrastructure, affordable public transport
• low property taxes; no wealth taxes
• no income taxes on the rent equivalent of your residence – even if it is a 7 digit mansion
• about 10k income p. a. is tax free
• low food prices (organic is expensive, of course)
• many subcultures with tolerance towards frugality (but rather not in your workplace)

Cons:

• difficult to get a permanent residence for non-EU citizens without regular employment over several years, but there is a loophole: studying in Germany is almost free, you can take up studies pro forma and see further…
• cold climate (on the other side: no air-con needed)
• language barrier
• internet surveillance is becoming worse – Germans are afraid of filesharing
• job market is difficult to enter – but, hey, you want to retire, don’t you?
• cars (e.g. RV) have high yearly expenses; gas is expensive
• high energy prices
• high child and ex-spouse support, and for huge minority still a housewife-stay-at-home culture

Let me now tell you about my own strategies of saving. To begin with, I am a very conservative investor, and never have owned stocks in my life. I have most in real estate which can be rented out. I can live from 500 € per month plus health insurance. I’d usually live in a house of my own, which I would partially rent out. That makes zero costs for living, but opportunity costs, because I’m not renting that room out. I buy only staple food, and I freegan in self-service restaurants and similar places. Still, I’m not stingy with food, so I might spend 200 € per month. Clothing and shoes amount to less than 50 € per month. The opportunity cost of rent is about 200-250 €. When traveling, I might not keep a room for myself at all, leaving more money for transportation. I need little else, and I travel very cheap by hitchhiking and cheap air tickets. In the city I use the bike. I like to couch-surf and offer my couch. This also gives me the chance to meet other people with alternative lifestyles. I go hiking, cycling, swimming, none of which costs money. I avoid spending money in restaurants (freegan!), places of the entertainment industry, books, CDs, and for pre-organized travel packages. I don’t own a car, although I consider living in an RV in the future instead of keeping a room. I buy very little stuff new.

I’ll say some words about freeganing. It’s rather difficult to hunt and gather in supermarket trashes, because supermarkets try to prevent this. There has even been a court case with a 200 € fine in the university city of Tuebingen against a dumpster diver. Sometimes it works. I don’t usually do it, because the time invested is too much in relation to the return. When in Germany, I do a lot of fast food freeganing. I never buy the stuff, but it’s ok for free as a contrast to the vegetables and fruits I buy in the supermarket. It does not take much time, and if you are experienced, you find easy access to Burger King food trays in the trolley. After festivals the trash boxes are full. The university self-service restaurants usually offer an “assembly line” of trays etc. I read that one third of food in Germany is actually thrown away. Going out in the evening is often cheaper than to stay at home, because when I’m in cities, I often find food. (Of course, I wouldn’t pay for clubs, or drinks. My high monthly food cost is due to being in restricted in my search by being at work, or in a city, where I can’t risk being seen freeganing, because of my work.

Clothing can also be found – with shoes it’s more difficult. Germany is an expensive country, when it comes to clothes, but I have little need for brand and fashion. Two pair of shoes per year are very likely, since I’m walking a lot. (No car.)

Originally posted 2010-08-17 11:21:47.

I am sure you have all heard of the concept of reducing your number of possessions to 100 things. Why 100(*)? Probably because it makes for a great book title or blog project of the “How I did X in a year” [and then returned to my normal ways with a nice check from the publisher to boot].

X could be writing on your laptop using candle lights of some other silly project

(*) Life would be much easier if humans had 8 fingers instead because it would make round numbers easily expressible in powers of 2 or 4 or 8 [instead of 2 and 5]. Also, there would be more of them. Anyway…

This may all be fine and well. Admittedly, there is a cult of minimalism and I like minimalism insofar that it makes a lot of my goals, primarily revolving around the concept of independence, a lot easier to accomplish; however, in many cases there also seem to be some kind of oneupmanship going on where people try to demonstrate that their “faith” is certainly stronger than others.

From a practical viewpoint, 100 is just useful to inventory your possessions. However, there is not really much point to that unless you’re writing about your project. From a practical standpoint, it is far more important to consider

• How much volume does your stuff take up?

• How much does it weigh?
• How much do you use it?

Volume typically determines your storage constraints and to some extend your transportation constraints. There is a theory that houses have gotten stupendously—a word possibly derived from stupid, I’m just guessing—large because of the need to shelter all the junk we pull home from department stores. Shelter is really expensive, especially if you want to it in residential areas and want to keep your possessions heated or cooled to the same temperature as you keep yourself.

Weight is an issue if you are carrying it. It is also an issue if you live in a boat or in an RV. We live in a RV, but we don’t have slide outs. This means we can carry a few tons per person. If we had slide outs, our weight constraint could be surprisingly small (after deducting allowances for water (white, grey, and black): maybe a few of hundred pounds each (including the weight of the person!). This is because slideouts is a modern invention (and therefore not a solid construction) intended to convey the sense of space for a short vacation at the lowest possible price. By reducing cargo allowances, the RV can carry slideouts instead without increasing the size of the engine or the bulk of the frame. The same goes for wide beamed cruising boats. Lots of space, but not as safe as deep keels.

Usage is of primary concern to a financially sound ship. This enters in your personal return on asset calculation so to speak. How much have you paid for which you do not use? In terms of saving and spending, economically and ecologically, if you have 101 items (and as a consequence surely are on your way to the minimalist version of hell, which presumably involves having pictures hanging on the wall or a stacks of papers scattered on your desk) it does not matter if they are used regularly, don’t take up much space, and don’t weigh a ton(*).

(*) Weight is actually a good proxy for environmental impact as well. With a few exceptions (like laptop computers and hybrid cars due to simply offshoring the impact to a high tech factory) the more it weighs, the much resources it took to make it, and the worse it is.

In addition, 100 items is a static number. Suppose you have 100 items your pair of pants is one of those items (or is that two items?!) wears out. Then you go and buy another pair. Now you’ve used 101 items. If you keep your list short simply by rotating things in and out does it really count, simply because you have not bought them yet? From a strictly “religious” point of view it does matter because that is not against the rules of minimalism.

It would defy the other points though. For instance, I could get rid of all my cookware and start eating out. This would reduce the number of things, but would that be a net benefit to my “business” of living to outsource all my assets like this? For some reason, I think not, other than to adhere to some faith.

Now it may seem I am bashing this challenge. I am to some extent. For the most part though, it is probably doing more good than bad because it forces people to take a good look at what they really needed. It also minimizes shelter needs and makes transportation easier insofar that one of the items on the 100 list is not an oympic swimming pool or a lawn tractor. What I am bashing is the idea of putting a number on it and sensationalizing it. That is just nuts.

Originally posted 2010-03-04 09:11:58.

DW and I were talking about how personal finance can be easy in theory and hard in practice. I think the reason is that theory, like language, occurs in two steps. Passive and active. Understanding and speaking. Passively, yes, sure we understand that we should spend less than we earn, that we should save money. Actively, it is harder to translate thought into action.

One problem is that many people are more focused on method than on motivation. Give us 10 easy baby steps to riches, a list 200 sure fire ways to save money, or the easy way of dollar cost averaging an index fund, but lo and behold. People will pick the few items on a list that seems convenient to them but which considered as single items do not make much of a difference. For example, they may start using CFLs or turn the lights off, but this is unlikely to cause a huge change in the budget.

The problem is that the motivation is not aligned with the actions.

A very simple way to think about personal finance, and this is really all you need to learn, is to think of yourself as driving a car towards a destination. Let’s assume the car is an automatic. Then it will have an accelerator and a brake. For every action, you take, you have to stop and consider this: If I do this; if I engage in this activity am I pressing the accelerator or the brake?

Sadly most consumers are pressing the accelerator and the brake equally hard. Some even think that the point of earning money is to spend it. No wonder they’re not going anywhere.

To get ahead, you must either press the accelerator harder or ease on the brake. Apparently lots of people are not fully aware of just how hard they’re flooring the brake. Therefore try this exercise. Every time you touch something, ask yourself whether this item has accelerated your income or whether it has decreased your savings.

If it has accelerated your income, good for you. But ask yourself whether you could have gotten something with more oomph in it? Similarly, if it has decreased your savings, ask yourself whether you could have done without it or used something you already had?

Again, this means, for every decision, you must verify whether this is an accelerator decision or a brake decision. Once you start thinking in those lines it becomes much easier to avoid sitting on the brake.

Originally posted 2008-03-20 07:20:02.

Some people use credit to spend their money before they have earned it. Other people spend money as they earn it. However, if one wants to get wealthy, one needs to re-earn the money.

First order re-earnings work like this. Pick an interest rate, let’s say 4%. Once $100 is earned, it is deposited in a savings account where it earns interest. This results in $4 re-earned over the year. These are the $4 that can be spent. It may not sound like a lot, but that is a matter of perspective. Why next year there is another $4 to be had from the same $100. If expenses are limited by what can be re-earned wealth obtains.

The first thing I started spending re-earned money on was my book addiction. I got most of my books used and I get maybe one major text book a month and a paperback or two. On average. This costs me about $200 a year. To afford this I need to save $5000 and I got my reading taken care off. In other words, I don’t think of the $5000 as $5000 to spend but something I have to pay to get $200 each year in perpetuity.

However, perpetuities do not create more wealth. If more wealth is desired one must look at re-re-earnings or second order earnings. Save $10000. This gives $400 in re-earnings. $400 results in $16 in re-re-earning. Spend the $16 and use the $400 to build a new base.

As with most personal finance math, this is trivial. The difficulty lies in changing one’s view to reflect this philosophy. If I give you $1,000 do you see $1,000 to spend or do you see $40 in perpetuity?

Originally posted 2008-02-23 07:29:01.

If it was not already clear, watching the Grammys showed that whoever is famous or the most popular is not necessarily the best or the most creative(*). Thus often it would seem that the only conclusive best metric of “the best” is that they have the best connections, that is, the best network either presently or historically. They are famous because they are famous and often they restrain themselves to their own little circle of famous people and give each other rewards for being the “best”.

Best out of … ?

I get the strong impression that search engines measure quality in the same way, that is, not being smarter than a bunch of algorithms, it is easy to confuse popularity with quality. This may even be intentional when viewed from a consumer perspective as people prefer to consume that which they are familiar with. For instance, I just learned how to make coffee which is better than what is sold in cafes. Read the previous post for details; yet, how many will give up on the familiar right now and pick the better option?

(*) One might begin to doubt that half of these people can even sing or sound good without modern sound engineering; today you mainly need to look attractive and be able to dance to make it as a “singer”.

The traditional option is entrenched.

I see the same thing with blogging. To be honest, I feel more stale than fresh and there are blogs which cover what I do and do it with more spirit than I do; or at least so it seems to me. I also realize that I am actually one of the bigger early retirement blogs, very likely in the top 5. What really worries me is that search engines will take my current popularity and entrench it solidly thus hiding more interesting writing from view. Forsooth, I suspect many of the popular blogs are even counting on this staking out claims in the virtual dataspace of the search engines by not necessairly focusing on increasing the quality of the information but rather optimizing for what search engines reward, namely crosslinking and quantity.

Unlike many, I do not believe that google will rule the world forever. I am old, so I remember what was before google. The great thing about google was that it could find everything (or rather it could find more than anything else). This ability is also its weakness. If you google something you often get a million hits arranged by popularity. However, as we know, popular often means a mediocre product optimized for a profit that isn’t yours. If the mighty google falls and fails to optimize its algorithms, a lot of “ground” could suddenly be lost.

I would see this as a good thing. Conversely, there are many vested interests who would see this as a bad thing. And these are just two examples of the world we live in.

Originally posted 2010-02-01 18:03:52.

Snow has for some reason(*) become a popular metaphor for handling money. There’s snow flaking which involves finding money in odd places and odd jobs and using it to pay off debt. Paying off debt has been associated with snowballs and avalanches describing how it becomes easier and easier to pay off debt once the finance charges decrease.

(*) I have some idea of who originated these, but I forgot to take notes and I’m too lazy to investigate, so let me know if you want to take credit.

These metaphors, in particular the snowflaking, all revolve around certain attitudes towards money with respect to getting out of debt.

However, snow melts and it is only relevant during the winter, so I think to properly describe the financial independence mentality, we need to cast it in forest terms.

I think living each day as if it was your last is an immature philosophy. No, live each day as if you were going to live a thousand years, including your last!

The start of financial independence includes a strong vision of one day creating a metaphorical forest and living harmoniously with the forest. It starts by planting seeds. These seeds grow into saplings and the mind starts connecting the vision to the upcoming reality of a mature forest. When you live for the future, your present will very much be determined by the actions of your past.Hence you will only live in a forest if your past self at some point decided to do so. Contrast this with living for the present in which case your future will be uncertain.

A person living in the present would very much like to cut down that forest as soon as possible and turn it into hamburgers. A future-oriented person would carefully try to preserve his principal asset, the forest, and only cut when necessary and live of the trimmings. He would think of his wealth as the amount of wood he can get by trimming, not by the amount of wood he could get if he cut the forest down.

Unfortunately so many people see it different. That is why they keep working to cut down both existing wood as well as working hard to plant seeds and cutting down the saplings as soon as they get a chance. They do not see the freedom the forest offers. No, not at all. The entire focus is on maximum wood production in the present.

Your future will give you what you deserve.

Originally posted 2008-12-27 09:11:04.

“Are your sofa and TV your best friends? You could change that. … . You can break free from the clutches of society and live well on a very modest amount of money if you simply give up most of the junk most of us cart around.”

A quote from How to Live Like a Gypsy – by Mengro, The Road Scholar

I encourage you to read the article and also check out the rest of the site. Some of the converted vans are pure genius in how to maximize space and utility. Nevertheless, after mulling it over I don’t think that I am the traveling type and neither is DW. Also there would be too much stress (for me) in dealing with people and authorities that are incapable of understanding and accepting this particular kind of lifestyle. Maybe some day people will stop being afraid of things that they do not understand and stop trying to outlaws things that are different. Yet this is not the case yet, so for me the van is out.

Still, it is a least possible to “say no to more stuff” without being persecuted although with the recent spending package it may be seen as unpatriotic if you don’t help the economy by shopping for more stuff?

So why do I not like stuff?

Let me tell you why. Stuff limits one’s choices. It holds one back. For instance, last time we moved, 1 bedroom houses and apartments were not an option because we “needed” the extra bedroom to store the extra stuff we practically never use. I know for a fact that the stuff I really need, and by stuff I mean clothes, computer, cooking wares, shoes, … fits in a couple of suitcases. Still I have let myself slip a bit and accumulated a bunch of stuff like books, CDs, DVDs, and various cast iron weights for exercising. I do not consider furniture part of the equation since I am ready to dump it any time. I estimate that the sum total of my current possessions currently fits in the trunk of a car if we assume that the bicycle can be transported on a rack on the roof. DW has not developed quite the same fanatic appreciation for minimalism as I have. In addition, we did not manage to get rid of all of our standard i.e. oversized furniture. Hence, when we moved we had to rent the largest U-haul we could get without renting a bona fide truck. The last time we moved it only involved 3-4 trips with an SUV for me and my two suitcases plus a box. I remember DW telling me that she only needed one car load the time before that. Clearly we are heading the wrong way. I am afraid that one day we might end up using the garage as an overflow reservoir for the stuff that continuously goes in through the front door. Yikes! This means that we would need a 24′ truck to move and that we could only live in 3+ bedroom places.

This would require a higher rent and a higher deposit. In addition there would be more rooms to heat and keep clean. This in turn would take away time and require me to accumulate more assets to support it. See a problem here?

The thing that makes no sense is that we really don’t need this stuff that just sits around in closets and bookshelves. Or put it another way, I need my freedom to choose where to live and where and whether to work more than I need another gadget, book, piece of clothing, weight set, CD, etc. Therefore I am continuously trying to vigilant about how much “mass” and how much “volume” is brought in through the front door. You see, the money to buy something is not nearly as much an issue as the “ghost-costs”of storage and maintenance that comes along. This is time and money that could be spent better on living life. Since rent is usually the biggest expense on the budget, foregoing the storage of rarely used stuff allows one to live in a smaller space and save tons on housing costs. Parring one’s possessions down by even one bedroom might mean a monthly savings of $200 on mortage or rent costs which is saved would turn into a quarter million at the time of retirement.

Now perhaps it is understandable, why I really don’t like stuff. It is holding me back!

Simplify, Simplify!” — In the Footsteps of Thoreau

The simple life

Originally posted 2008-01-28 06:56:19.

Those with lower wealth will eventually get done in by consumption. They’re simply spending too much to be able to invest significant amounts overseas.

— from the book Richistan by Robert Frank

I’d make that “invest significant amounts” period. Wealth is defined as the ratio between investable assets (not consumer assets like the house you live in and the car you drive) and expenses.

Originally posted 2008-09-08 00:39:19.

Diversification is a method of avoiding non-systemic risk. Non-systemic risk is the kind of risk that involves uncertainty of individual components. Systemic risk is the kind of risk that involves uncertainty of all the components taken together. Indexing for investing is a typical example. Diversifying avoids the risk of individual stocks but it does not avoid the risk of the entire index (market) tanking.

Here I am not going to talk about investment diversification. Rather I am going to talk about income diversification. I believe this is important but widely underappreciated.

People speak of losing their job as a disaster and this is usually the main reason why people have emergency funds. Most people have most of their income staked on a single source – typically their career if they are working or their retirement savings if they are retired(*). Thus if they lose their job or their savings, they are deeply troubled.

(*) In case of retirement, there are often two sources: savings and social security. However, being less than 50 years old, I’m not counting on getting my SS contributions back when I finally become eligible.

One of the hallmarks of generation X and certainly generation Y – and I’m right in between these generation – is entrepreneurism. The reason is that we are used to job insecurity and not having any promise of continued employment due to outsourcing, lay offs or limited contracts. Since steady employment from the baby-boomer managers is not a given, a lot of us have decided to abandon the previously implicitly assumed loyalty to our one employer and instead start our own business as a consultant, contractor or a small business.

Now your financial advisor is probably a baby boomer and he just might not get it.

When you own a business, you no longer have just one stream of income. You have hundreds or at least one from every customer. To illustrate the associated risk, I could post a blog on something controversial (religion, stem cells, abortion, …) and probably lose 10% of my readers. This would not be a big problem though since I would retain 90% of the rest. Conversely, if I do something controversial on a job, I could lose 100% of the job.

This is why diversifying sources of income is wise. It is also why being a specialist could be an increasingly tenuous position. I for one am not betting my financial security on that concept. Better to be a jack of all trades these days.

Originally posted 2008-03-21 07:24:20.