Q: I find it hard to believe that you/anyone can live on $5-7k/year [without living in hardship].
A: That’s alright, I find it hard to believe how you/anyone can spend $30,000/year [without flushing money down the drain]. A simple break-down of the most important expenses (in year 2011) would be $270/month for my half of the rent+utilities; $95/month for health insurance; $75-100/month for food; $95/month for martial arts; $50/month for my half of the car; $50/month for my half of the dog; $20/month for internet. My other expenses are negligible. The car, dog, and the gym are more recent optional splurges which I’ve added as my portfolio has increased. So my core expenses are $5,820/year and my optional expenses are $2,340/year almost half of which is spent on martial arts. Take away the martial arts and it comes to $7,020/year. Also keep in mind that we currently live in one of the most expensive areas of the country (sf bay area) which has a cost of living index of 131 relative to the average US city of 100. My wife spends a similar amount per year.
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? If so, you need to read a bit more of this site because that’s NOT the kind of retirement ERE is about. Here retirement is used in the “becoming financially independent and using that freedom to pursue other interests”-sense. Incidentally, this is not a new idea. Rather it is an old and somewhat forgotten idea. 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: What’s your net worth?
A: Somewhat more than
4060 times of what I spend annually. This will theoretically last the rest of my life with a very high safety margin. If you don’t understand why investing the equivalent of 40+ years of expenses will last longer than 40 years, you need to read up on some basic retirement math or ask a CFP or similar.
Q: Do you clip coupons?
A: No. Coupons are mostly for preprocessed foods and poor goods that aren’t selling well. Cooking from staples is less expensive and requires less time if you consider the flexibility and the time saved from clipping and going to multiple stores. Good stuff do not need coupons to sell and staples are like commodities: You can’t brand name potatoes or lettuce. More generally speaking, I would say I am in a different class of frugal. I am not frugal because I need to cut cash outlays. I can plunk down $5000 easily. Now, if I can pay $5000 for something and sell it in five years for $4800, I have only spent $40 a year compared to buying something for $600 with a $100 rebate and having to throw it out 5 years later. This is how I save money.
Q: Do you dumpster-dive for food?
A: No, I’m not sure where that one came from. The only thing I’ve ever pulled out of a dumpster was some newspapers from the recycling bin to feed my composting worms.
Q: Do you make your own soap?
A: No, I’m not sure where that one came from either, but manufactured soap is one of the wonders of industrialization. It is much much easier to buy than it is to make—when I talk about “making soap”, I mean rendering it from lye and lard, not melting and reforming existing soap into cuter shapes. On the other hand I do make my own laundry detergent (out of borax, soap, and washing soda).
Q: How much did you pay for your degree?
A: I didn’t pay anything because I grew up in Denmark where advanced education was/is free insofar you have the required grade point average. 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… and what I’m telling you… 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 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. [Most common question on the blog]
A: Your health insurance is probably “fully loaded”. I pay $69 each month (2008) for a high deductible health plan which I obtained on the free market, that is, no “corporatist cheating” of having to get it through a job or a family member’s job. In fact, I think tax laws favoring employer sponsored group insurance is grossly unjust!
I max out my HSA which reduces my taxes by $450 a year (I’m in the 15% bracket). My net costs of health insurance are thus $402 per year. Back when I was in the 25% tax bracket making my net cost $69*12-0.25*2900 = $103/year. How do you like them apples?
When I was working I intentionally dumped my company health insurance for the HDHP—note that many companies only offer the fully loaded plans. Ask your employer if they offer a HDHP. In such cases it is not unusual that employers would cover you for free.
HDHP’s are cheap because most of the responsibility is on the consumer. They remain cheap too. For example, when I am 55 years old, the cost will be $155 per month in today’s dollars. Read this post . It should also be noted that I don’t have any pre-existing conditions and that I take a more conservative (continental) approach to health care, that is, I believe in prevention rather than treating symptoms and I don’t medicate for everything. DW has her health insurance through her company, so we have separate health insurances.
Here’s a newer update on cheap health insurance.
Q: What about dental or vision?
A: I don’t have dental or vision insurance. Paying insurance that covers “regular maintenance” like teeth cleaning or contact lenses which these kinds of insurance do makes no sense whatsoever. Suppose everybody pays $25/month for contacts. Now do you think that everybody paying those $25 through an insurance company will make it any cheaper? No, the insurance company will add a $5 administrative fee—they most definitely will not give away free money. As such this kind of insurance is nothing but a financing plan for people who can’t figure out how to save the money for a $200 dental visit. The point of insurance is to cover rare events with a six-figure cost, which dental or vision simply doesn’t have.
Q: I couldn’t see myself living in a RV if that’s what it takes.
A: We pay $475/month to live here or $5700 per year. I budget for half of that which means in my budget, I count it as 475/2 = $237.5/month. Note that $5700/year with, say, 1/3 paid in property taxes and maintenance would make for a mortgage payment of $3800/year, which at a 4% yield would correspond to a house of around $100,000. This will get you a shed (or an RV parking space) in California but a middle of the range house (2 bathrooms, 3 bed rooms, 1 garage) in many parts of the country. So no, you don’t have to live in an RV although it’s quite fun.
Q: I bet it’s really cold/hot in the RV during winter/summer.
A: I hate to point out the obvious, but that depends on where you live! We live in the bay area which has a balmy climate almost all year around. Obviously, if we lived in cold Alaska, we’d buy a house instead. For year round living in an RV with low utility bills (we pay about $30/month for electricity or gas respectively), you should probably stick to a latitude of approximately 45 degrees.
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. In addition, my xGF had two teenagers. I have thus seen all aspects of parenthood from the first step and the first word to helping with homework and to be honest, my preferred ideal of having kids would be if they were 20 years old and moved out already Yes, it may be that there is a difference if they shared my own genetic material, but I don’t think so.
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 problem is parents spending money on their children without limits. If you adopt the same basic guidelines for your children as you do for yourself, the cost will be low. The fiscal or frugal problem happens when parents are willing to spend less on themselves but still create a consumer lifestyle for their children. I believe this is doing the children a disfavor. Unlike stuff which you can just put in your garage, children need attention which you can either provide yourself or pay someone else to provide for you. 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: What about DW? How does she feel about work?
Like most people, DW does not consider her going to work for 8-10 hours a day as big a sacrifice as I do. Although it is impossible to predict how you feel about work down the line (The “I can see myself passionately working in my career until I die” statement is usually made by people with only a couple of years of working experience. I know. I used to say the very same thing.) she may be working until her
late 50smid 40s or so.
Q: How much did you make while working?
A: While I was in grad school, I earned Swiss Francs and the exchange rate is kinda lost in the fog of memory. Figure something like $20-25,000/year after tax. 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. You can earn this kind of salary as a toll booth operator, a delivery truck driver, or a with a useful college degree. 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; but the work was interesting to me at the time.
Q: How can you retire on less than a million dollars?
A: The great majority of people never manage to accumulate a million dollars and so not that many actually retire on a million dollars. A million dollars is simply what is required to replace the expenses of an average consumer family, that is, 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 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 60 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? [Most common question IRL]
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 so do they) and swap and recycle items with the “middle class” for free. You’ll rarely see me in the mall.
Q: [Related] how can you live comfortably on so little money?
A: First, I spend my money more than twice as efficiently as the average person. 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. (Also see Captain Vimes’s “Boots theory”).
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. My goal in life is not to spend more money. To put it very simplistically, my goal is to become a more well-rounded and capable human. I strive for competence or personal growth if you will. More money will not help me do that. To give an example, no matter how much money you have or spend, you can’t buy a black belt in martial arts. A black belt has to be earned with something other than money. So it is with many other things in life that can not be bought, like friendship, respect, understanding, health, … When I was younger, I did indeed get a kick out of buying things, but it was a short lived joy. I found no long-term satisfaction in buying things. If buying stuff is enough to make you happy, then good for you.
Q: How can you be retired if you still make money? (Definitions of retirement, financial independence, and semi-retirement)
A: People used to work in one vocation until they grew old, worn down and nonproductive. Then they would be retired, “put out to pasture” so to speak, and get a pension. ERE shares some of these qualities but not all of them. Different generations have different definitions of what retirement means to them. The confusing part is that we use the same words to describe different things because ERE is still so uncommon that no common words exist. First, the concept of working only one career is outdated. Second, not many will be lucky enough to receive a pension. The point of ERE is to reach financial independence (FI). 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. (Many people who pursue ERE manage their own funds). Being freed from having to work to pay the bills, many EREs [plan to] retire from professional life in the sense of no longer working in that career. (For example, I was a physicist, but I no longer do any physics, I don’t even think about it). This usually means taking up some other activity that is more meaningful to them but which would 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. Whatever rocks your boat. I call it a hobby and so does the IRS (I pay income taxes on my writing, but I don’t take any deductions). I have no idea how much “work” I put into it. Sometimes 10 minutes per day, sometimes 50 minutes (if there’s a particularly interesting forum discussion), some days none at all. But then every few months I spend a week hammering out a longer article for some magazine on a pro bono basis. Work work work ;-P
PS: To add to the confusion, “semi-retirement” is sometimes used to describe a person who derives some income from investments but not enough and thus needs a job, typically part-time, to make ends meet.
Q: You can not be retired if your spouse is still working.
A: Why not? 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/handouts. 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.
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. Our budget is a compromise. We share expenses 50/50 for household expenses but not personal entertainment, personal savings, or personal health care. 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 or something similar like subletting parts of the house/apartment. Read more about marriage and economies of scale.
Q: This may work for you, but it would never work for me.
A: Is this your problem or mine? Regardless, don’t get too involved in copying what I do. 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] with out incomes. We differ in terms of how we invest e.g. stocks, real estate, or private businesses or how we manage not to pay for things e.g. repairing things, being minimalists, work camping, or homesteading.
Q: Wouldn’t society collapse if everybody retired?
A: For an answer to this and similar questions such as whether everybody is obligated to have a job for the good of humanity, this forum discussion should prove illuminating.
Q: You’re not retired, you’re a blogger, and based on your alexa/google/etc. ranking you’re making $120,000 per year
A: Ha! You wouldn’t happen to be one of those who lost a bundle in similar optimistic valuations during the dot com bubble? Let me tell you what, you give me $100,000 and you can take over my blog. If you’re right you should recoup your investment in 10 months. That’s a great deal if you’re right. But you’re wrong. A well-monetized personal finance blog can make $3-8eCPM, that’s 3–8 bucks for per 1000 views. You can see how many views ERE gets by checking my sitemeter stats. Even if I really put my back into it, I’d still make less than $1000/month(*). Actually, I make more like
$100$200/month on ads. My rates are given here and here. Now multiply by the number of ads I’m running and subtract a 25% administrative fee. Sure, I’m probably leaving money on the table and, sure, I could earn more if I did more SEO, inserted more payday loan and mortgage text links, and sold affiliate junk. Note that I also makes about 6-7% for anything sold through amazon.com. This varies from $30-200 per month. It’s usually around $100. The way it works is that amazon leaves a cookie on your machine if you click on a link; then I get my cut from anything you buy within the next 24 hours—people rarely buy what I talk about on the blog, it’s usually something else. Thanks to the new California nexus law, Amazon terminated its contract with all its California affiliates. Thus I no longer make any money through the Amazon program. Apparently the government of California realized that their nexus law had unintended consequences (such as a massive loss of taxable small business income) and they have reverted their decision, at least for another year. I’m now again an amazon affiliate. I am once again NOT an amazon affiliate because I now live in Illinois which takes the same stance that California used to take.
(*) This would, however, be more than enough for me to live on. Yet I don’t recommend making your living as a blogger. The pressure to perform is very high and writing for a living can easily lead to burnout. If you don’t believe me and you haven’t been blogging for more than a couple of years, please wait and check back with me in a few years before you disagree
Q: If you’re financially independent, why does your book cost money?
A: If I may paraphrase Andre Kostolany (a famous and wealthy stock market speculator): “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.” Yes, it’s a vanity thing. If the book was free, sure, maybe tens of thousands would download it, but I would have no idea whether they valued it. They might not even read it. Here’s a post that describes why it makes sense to charge for something even though you don’t need the money. Most CEOs, actors, rock stars, famous writers, billionaires, etc. do it. Why shouldn’t I?
(*) Overall, my book sales have increased my net worth by 7%. If I had wanted to increase my wealth, there are far better ways of doing so that writing. A minimum wage job would have been a much more profitable use of my time.
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. In my case, I think I can do more good (judging by the number of nice emails and comments I receive) 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 (Norway, Denmark, Sweden, Poland, Switzerland, Germany, Austria, France, Belgium, Canada, Japan, Czech Republic, Scotland) 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 (Gingery style). 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: I used to respond positively to these request but after seeing the typical popular reaction, my answer is now no. Mass media in its current form is unfortunately an unsuitable format for presenting ideas that are controversial and complex in nature—in fact, those programs tend to turn into freak shows. For further clarification, see Jerry Mander’s Four Arguments For the Elimination of Television.
Q: Why did you take a job and go back to work?
A: Just as there were several reasons that I decide to retire from physics and spend my time writing ERE (lost interest in physics, didn’t like the politics required for an academic career, felt that writing about ERE was more important, …) there were several reasons why I decided to take this job and go forward to work. First, I felt like had exhausted everything there was to say (at least on a daily basis) about ERE. I don’t feel like repeating myself and thus the blog has been on autopilot since fall 2010. Second, the personal cost to me and my family from slanderous attacks from random people who haven’t read or understood much of the site but felt like giving their opinion anyway was beginning to take too much of my energy as the blog was getting more and more popular. Everybody has a tolerance limit for this and I was reaching mine. It’s not really fun being a public figure associated with controversial subjects like saving money and not being a consumer when some show little restraint in terms of quoting out of context, making things up, and/or using asinine sensationalism to make their point. I guess it’s similar to being a politician and dealing with attack ads, only in my case the attacks mainly show up on various forums on the internet. Third, working in finance has been on my “bucket list” for several years. I always thought it would be a cool thing to try working with one of the world’s primary information systems that decides how the world runs (the three systems are politics, economics, and ecology), so when this opportunity was offered to me through a friend of mine the decision was easy to make.
Understanding things in their proper “historic” context, it was clear, if not to me, then to many of my long-term readers, that my enthusiasm for the blog had been fading for quite a while already and that I was ready to move on to something new. Until this offer came along it was not entirely clear what it was going to be yet. I had been talking about touring across the US on a bike OR building a tiny house OR even buying an RV park to create a kind of ERE city full of like-minded people. But seeing this was a once in a lifetime offer (at least as far as I’m concerned) I had to say yes or probably regret it later.
If that confused a few people’s definition of “retirement”, so be it …
In general this decision was entirely consistent with what I have been writing about all along: Always further a broad set of valuable skills (the Renaissance ideal) and arrange your finances (financial independence) and lifestyle (self-reliance and location/independence) in a way that increases your resilience and the number of opportunities you have in life.
Did I forget anything?