I was flat broke, without a job, and $50,000 in debt at one point in my life. It took me fifteen years to turn it around and achieve financial independence.

Now, looking back, I realize that anyone in the US can achieve financial independence in as little as a few years, how long it will take depending (mostly) on the lifestyle you want to maintain.

Frugality is a part of the formula as it is one aspect of being “in touch” with your money. Wasting money is simply bad on many levels but most of us waste a large percentage of the money we earn on absolutely unnecessary wants.

It is wasting money that traps many of us in the rat race and forty years of being chained to jobs we would rather walk away from.

But besides wasting money on wants, most of us spend way too much on needs. Housing is the best example of this. You can buy a house in the traditional manner, a thirty year loan, and for the first ten years, almost 90% of what you pay on the mortgage is taxes and expenses.

The other mistake is to buy more house than you need (more money wasted on a want). There are several very legitimate options that can turn the cost of housing into an asset. For example, I bought a duplex, lived in one side and rented the other. My net monthly cost of housing was less than three hundred dollars and when I sold the place three years later I made almost $90,000.

Taxes and transportation are also places where many of us are asleep at the wheel. On average, based on fed statistics, housing, transportation, and taxes account for almost 70% of the average household income. Reduce that to 20% and you could live on half of what you are spending now.

If you could do that, you could kiss the rat race goodbye and work three days a week doing what you enjoy.

You don’t need a million to escape; all you need is enough to maintain your lifestyle. The less that takes, the sooner more options will be open to you.

It is quite possible to live a middle-class life in the US for $12,000 a year IF your housing is earning you money, your transportation costs are minimal, and you reduce your tax load.

But you can’t get there with the kind of thinking that got you where you are today. Einstein said it best, “A problem cannot be resolved at the same level of thinking that created the problem.” You will need to think AND live outside the box to live differently than is the norm today.

I appreciate your contributions to that “new thinking” model.

@ ron – my sentiments exactly. I have also thought of the duplex option but with my current career (unstable job prospects) settling has not been an option yet. If my wife gets a steady job after she gets out of school this might be a real option though. While I’m FI, she’s not (we keep savings and investments separate).

@ claire – yes, yes, rent, yes 🙂 I live together with my wife in NorCal in one of the wealthiest midsize cities in the US. The $11k is after tax money, but I imagine that if we earned around that amount, taxes would be quite small.

Wifey handles everyday microfinancing (I handle taxes and investments), so I only see what we earn and what we save, whence expenses must be the difference. I do know some numbers though.

This would be my share of our budget.
Rent: 700 (my half of the rent of the house) – by far the largest expense. I’ve considered getting an RV (because we move around a lot anyway) and move to reduce this to $250-300. The wife is resisting though.
Food: 75 (my half, this used to be much higher, like $200+) but I instituted draconic measures which made it a lot cheaper and a lot less expensive e.g. beans instead of steaks)
Utilities: 30-40 (my half) (depending on season)
Dish: No idea 20-30? (it’s the most basic plan)
Landline+cell+dsl: No clue, the net is flat rate and she mostly calls those on her pay-nothing-per-minute list. I never use the phone (I hate phones!).
Car: No idea either – but the car only goes grocery shopping a couple of times a week. We have the highest deductible geico would offer (and we get the BRK shareholder discount :O) ). Wifey works at home. I cycle to my work.

When we first moved here we spent quite a bit more but now we’ve scouted out all the inexpensive options – where to get groceries, tv (there’s ZERO broadcast reception where we live), net, etc. ..

When we lived in the midwest, my expenses were around $6-7000/year. That house (rent) was slightly smaller, and we did not have landline, dish or net.

Our health insurance is paid by my employer so I don’t include that, but I’ve verified that I can get a high deductible plan for around $80/month should I lose my group health insurance.

You know, you can make almost anything work if you really want to and make the decision to be happy.

I’d like to reinforce Jacob’s figures by providing my own. I live in a high-income (and apparently high-net worth) neighborhood of a high-cost East coast US major metropolitan area. I share a house with a roommate, so the cost splitting is probably similar to Jacob’s situation (except for healthcare). Monthly:

$650 rent
$ 90 utilities
$ 65 high-deductible medical insurance
$ 75 storage
$ 25 bike maintenance, parts
$200 other/discretionary travel
$200 food/discretionary dining
—-
~$1300 total

Though I can fund the above with monthly investment income, I could very easily cut myself down to Jacob’s level or less, if I needed to (without leaving my neighborhood):

$500 rent (find a cheaper room to rent)
$ 30 utilities (cut out $60 cable bill)
$ 65 high-deductible medical insurance
$ 0 storage (remove/sell/dispose stored items)
$ 25 bike maintenance, parts
$ 0 other/discretionary travel (stop traveling)
$150 food/discretionary dining (no dining)
—-
<$800

Note that I’m far too lazy (for now) to follow Jacob’s lead when it comes to food. I just don’t like food preparation, or even shopping for food. And you can see that that laziness costs me, with twice the food costs of Jacob even though we probably live in areas where food costs are similar.

So my annual costs could range from $10,000 to $16,000 depending on how I want to live that year. Even splurging at $16,000 a year, it’s still far less expensive than most people imagine they can live, either married with no kids, or single sharing a house and related costs with another single.

I’d like to hear from folks who have kids, and how much that adds to annual costs, in dollars per child.

Yeah, I like cooking as you might have guessed from the disproportional number of discussions of recipes and kitchen utensils on this blog. I’m a fan of Iron Chef America and I used to read a lot of cook books. Give me a random assortment of ingredients and I can whip up something good without consulting recipes. Perhaps this is why sales shopping works for me. DW actually does most of the cooking and she’s more traditional. If I got free hands, I could probably cut it down to $50.

Jacob,
I agree I could probably live on $11k with the exception of medical costs — they would run be an extra $150-$250/mo and growing as I get older.

However, most folks are planning for 2 people — would you say your household expenses run $22k/yr or are they higher? I would say my wife cannot live at that level with me – however I think our expenses could be at the $35k level with both of us factored in.

In the biggest city of Canada, here is my tally for our household:

$2,000 Mortgage payment + tax + fees
$150 Utility (DSL and cell paid by company)
$220 Auto insurance and gas for 1 car
$650 Day care for 1 child
$450 food/discretionary dining
$200 other (diapers, toys etc.)

——-
$3,670

A pretty good 2 bedroom apartment with easy access to subway costs around $1600 with heat and hydro included. We’ll probably be living there without a young child.

Driving the kid to day care cost at least $30 a month for gas.

I can argue that the kid costs us $550(extra housing) + $650 (Day care) + $75 (gas and other). The total is $1,275 a month.

($3,670 – $1,275) divided by 2 = $1,200 per person.

When I compare the expense of raising the little one to the joy of that, I do think it’s one of the greatest bargain I can get.

Hi Jacob

Thanks for the info. It seems like a pretty bare bones sort of living – do you take vacations or have any sort of expenses for dining out or going to bars? what about clothes or hairdressers or dentist etc? Do you still work or do you live of investment income?

thanks

Claire

I agree that it’s not terrible to go by what’s cheaper each week in the market for food choices. I just happen to be very picky and go with my specific hunger when picking what to eat. Some days I really want a certain spice or flavor, and I won’t really want to eat otherwise. I figure spending money on food is the most important investment of all, since you are what you eat.

@claire – The operational budget only lists the bare bones. We don’t budget for anything else since most are one time or rare expenses and easily covered by savings (just means that a little less goes into investments that month). I don’t take vacations. I go to enough conferences to want to stay at home when I get time off. The kind of vacations I’m interested in doesn’t cost much money. I want to do an AT thru-hike or some long distance cycling. I’ve also looked into traveling on a cargo ship e.g. doing something out of the ordinary for vacations. I positively hate resorts. I had to go to Hawaii for a conference once. This was one of those “never leave the hotel grounds because there’s nothing else within a 20 mile radius deals but you can work out in the fitness room, spa, souvenir shopping, swim with the dolphins, visit our 15 restaurants, see the hula dancers. Boring! I only left my hotel room a couple of times to go to the beach. DW occasionally flies out to her family (while I stay home with the dog). We eat out maybe once a year. I hate eating out (can’t put the feet up, portion sizes too small, no spices, having to deal with other people to get my food and sit next to other families (I love drive-in) ). DW would like to eat out more. I can count on my fingers the number of times I have been to a bar in my life. My idea of a good time is being at home with friends, drinking cheap swill and hideously expensive whisky (Ardberg), and doing stupid human tricks or watching a movie. Not sitting in a smoke filled room shouting to get heard and paying $7 for drinks. Just never liked it. My clothes is 1/3 hand-me-down/overs (shirts, sweaters), 1/3 thrift (overcoats, pants) and 1/3 new (jackets, shoes, shirts, suits, socks, underwear). It is usually worn until it reaches terminal failure in obvious spots (less obvious spots get patched). DW gives me a buzz cut every other month (with my thinning hair I have accepted the inevitable – I used to have hippie shoulder length hair for a while that just needed a cross cut with a pair of scissors). DW does go to a hairdresser and never seems to be happy with the results. My major ongoing entertainment expense is hockey. I pay $100 a year (in advance) for unlimited pickup (rather than $7/play). Also I pay $100 in league fees three times a year. On top of that there’s replacement blades, new wheels, etc. This probably comes around to $500 a year total (fees included). I still work. Just before I was planning on pulling the plug, I was offered a research gig here in CA. Once that is up (it’s a limited term position) or DW gets a job elsewhere, I’ll stop my W-2 work (unless someone offers me a job at an investment company, a start-up, a non-profit org, or something equally exciting).

@ Thrifty Canadian – I have frequently wondered where the official(?) $250k/child estimate originates. Otherwise I agree with the numbers. If I had kids I would make it clear from an early point that if they wanted to go to college that they better study hard enough to get scholarships or otherwise pay their own fare e.g. probably living at home while attending the nearest community/state college/university.

Why should people set their sights so low to only have $40-80k income? I am putting in 40 years and my goal is to walk away with $15,000,000 in net worth. That will be worth about $5 million in 2007 dollars. That should support indefinitely a initial income draw of about $165,000 (again 2007 dollars) before taxes and adjust upward with inflation from there.

adfecto – I think that’s the point. You can easily work for 40 years and have tons of money when you retire, but why do that when you can retire earlier on less and enjoy freedom while you’re younger? I personally can’t think of what I would spend $165,000 per year on. My mortgage will be paid off and we have a middle class lifestyle with a nice vacation every year for $24k/year ($16k if we had no mortgage).

I can find some thing in common with some of what you say. I enjoy researching my purchases, I managed to save as much as 40%. I am not willing to go to extremes (no pun intended)! I will do more research as the price increases. I enjoy it, but I don’t let it take over my life.

We’ve found that the big European discounters Aldi and Lidl (don’t know if you have Lidl in the US?) are great for short-lived offers on food staples.

We’re not vegetarians (although we’re trying to eat less meat), but have found them to be great for discounted bacon etc. that starts off with a 30% discount and then has another 30% taken off after 3-5 days as they need to move on to the next offer.

The freezer is our friend when it’s possible to fill our boots with good quality cuts (normally German and boy do those germans like their meat!) for a fraction of the price of the same quality from the ‘regular’ supermarket!

While I was in college I got by just fine on roughly 10-12K a year living expenses excluding school of course. I enjoyed life, and realized that social experiences are worth far more than any object I could buy. Once the money starts coming in we seem forget that we ever lived on less.

People are surprised that silicon valley can actually be pretty affordable for living expenses. It has the reputation for high costs and high wages, which is true for most folks who work as professionals in large tech companies. But I’ve found that I’m able to live on roughly what Jacob spends, although of course no one would consider that I’m “living large” either.

For me the motivation to spend well below capacity is not reaching for early retirement– it’s really about not having to worry about getting laid off and possibly being out of work for a very long time. My financial cushion has allowed me to take on more risky assignments, and also to slack off in front of management when it suits me. Early in my career I found that I liked some parts of my job far more than others, but it was a package deal– or so I thought. Now I just trim off the pieces I like and leave it to my co-workers to pick up the rest (for me it’s the powerpoints and meetings I avoid). Fortunately I’m pretty good at doing the stuff I enjoy so it’s been win-win. And if a new manager hires in and wants to change the rules on me, I can look him in the eye and give him the “go ahead make my day”. So for me working inside a large organization became fun after I got to be the axe.

Of course the downside to my approach is that I’m never getting another raise or promotion (although I’m still in the bonus pool), but that’s a price well worth my freedom in my opinion. This also won’t help those who aspire to supervisory positions, as my attitude is obviously unsuited for management. Fortunately I saw early enough that would not be what I wanted to do, so I avoided getting trapped on that road.

Anyway my point is that even if you love your job, it’s still worthwhile to make some sacrifices early on to get into the position of not having to worry about stuff that keeps many people awake at night.

Oh and a tip for Jacob– fresh produce is very expensive at the national grocery chains here (and not just WF) but you can get amazing discounts at ethnic grocery stores. Sometimes quality is iffy, though, so you have to look carefully before you buy, but the savings can be pretty substantial. Also you can be sure that packaged goods will be very expensive at these stores (that’s where they make up their losses on fruit & veg).

@joer1212: You’re assuming that your portfolio will grow by the same amount every year. But that not what happens in reality. There will be periods where the markets will not return as much, or where your net worth will decrease due to crashes, recessions, etc. However, if you keep your spending level at 3-4% of the original principal plus inflation, it should last the appropriate amount of time, according to historical data, regardless of what happens in the markets (unless, say, something much worse than the Great Depression happens).

Just a note, I would not buy an used bed, why,
bed bugs. It is worth it. It seems that you pick up in hotel/motel rooms on your luggage. Before you
know it, you got bed bugs. I am referring to the mattress. The mattresses sometimes got bed bugs.
It is going on in the Canada and also in Florida
in warmer climates. If you got red marks on your skin, that is why. Buyer Beware.

As I’m reading all of these, I haven’t seen anyone mention how you live a frugal life and save money if you have major medical problems and 2 teenage boys.. I live in So.Cal. Does anyone have any tips for me? Please!

I guess I try to keep a balance in terms of spending versus saving. I’m not getting to retire young; way past that. I have gotten to do work I’ve wanted to do such as run an organic farm that I used to own, freelance write, etc. and I considered having the chance to do this sort of financial independence.

I’m back working a f/t job, faced with the need to save for some sort of retirement. I’d rather not live an impoverished old age down the road. At the same time, having seen two friends die at a younger age than I am now, and my dad not live to retire, I feel the need to balance saving and planning for the future with enjoying life to the fullest.

I want to trek around Europe, and I need to do that while I’m physically fit. I am planning a short bike trip, so ditto for that. I enjoy eating good food and feel that it keeps me healthy. And music and gardening are both passions that I put some money into. In short, these things make life worth living.

I don’t know how much I’ll end up saving; some of that depends on my employment situation. I know I could put every spare penny into savings, but for me that’s not the way I want to live. I know I won’t need $80,000/year to retire on; never have earned even close to that. I could live quite well on $20,00 at this time. I’m saving about 40% of what I earn pre-tax at this point, although my salary isn’t high given the non-profit work I do. If I got a housemate I could bring in extra money, but am really enjoying having my own space right now, but it is an option. Ultimately I think we all value different things and we need to realize what is important to us and plan accordingly.

But saving/investment in index funds/ETF is automatic and fool-proof though. I just take an automatic paycheck deduction and continue on with my life. And most likely, at my retirement, my money will be there and I can do whatever I want without any sacrifice.