Talk:21 Day Makeover

Cut the text and listed links instead. This is what was cut:

XXXXXXXXXXXXXXXXXXXXXXXx

Day 0: The Early Retirement 21 day makeover [1]

In the next 3021 days or so I will writing the practical guide to “retiring” in 5 years with a nest egg sufficient to cover all your living expenses. I am semi-confident that it will possible to make all the necessary lifestyle changes within one month if we drop all pretense of a smooth transition and allow for some mistakes along the way. So if you don’t mind roughing it, it is my posit that in 3021 days you could be fully underway to retiring from job-income. I expect it will take about 1 year after that to master the essentials and 5 years of sustained effort to reach the goal. After all, I did it!

I reckon that those who will succeed in this are those who from one day to the next can proclaim: “Okay, I will not eat candy bars again” and actually not eat candy bars again(*). It is the people that can lose 50 pounds and stay there without yoyoing. It is those who can commit to a challenge and not give up. This requires strength of character and deliberate creative action more than it requires tips, talent, or luck. It is, therefore, much like running a marathon.

(*) The candy bar example is just a silly example. When I was 18 or 19, I actually decided to avoid eating sweets and cakes. I did not eat any candy for 2 years and I did not eat any cake for 4 years. But when I was 24 I decided that I never wanted a mortgage, and … the rest is, as you say, history.

Don’t worry 8-) . There will be no cutting back in this program. Instead things will be cut away completely :-P . Trust me on this one: It is much easier to deal psychologically with not having access at all compared to having restricted access. Restricted access only serves as a constant reminder of what you are missing. No access on the other hand changes your priorities and values and soon those are seen as the ideal state and your previous state is seen as something undesirable.

There won’t be any small baby steps either. Although it is of course strictly up to people to adopt what they want, I favor an all or nothing, that is, an extreme approach. A Blitz Krieg of shock and awe if you will. Attacking full force on several points leads to synergy. For example, I will be recommending commuting by bicycle. I will also recommend getting in shape to save on heating costs and medical bills. These two fit together and they will fit with others things, and so on. If you do one, you get the others for free. If you are only willing to do either one but not all, you will still have to spend time on the other one in some form thus wasting effort. The whole is much greater than the sum of its parts.

I won’t waste any time on virtual dollar savings. Virtual savings is one of my new pet peeves. Virtual dollar savings are the kind of “savings” that are not really savings such as paying $10 for something that supposedly costs $20. It is the kind of “savings” that represents money you can choose not to spend in the first place such as latte-money. I’ll give you an absolute number: The goal here is to cut your expense level to <$10,000/year/adult. I live on $6000/year/adult. It can be done.

To make the change, you need to do three things.

If or when you have decided to commit, start immediately. The “I’ll go on a diet, starting next year” has never worked. Feel free to take your time thinking it over and build some commitment. Don’t commit on the spur of the moment, but don’t wait until the excitement has gone away either.

Make yourself accountable. Different people are motivated by different things. If you honor your word, you can make a public statement (feel free to use the comment section below). Obviously you should not use something that is counterproductive to your goal such as spending money to celebrate meeting your savings goal, duh!

No exceptions! No exceptions! No exceptions! Exceptions are self-destructive in so many ways.

I have a list of the first 21 days made out. I figure I will give it a week or so to see how popular this series is and continue if it takes off.

Anyone ready to commit already? :-)

Day 01: Finding a place to live [2]

I think if there is anything that is holding people back from realizing their dreams it is living in a place that is too big or too expensive, unless of course that is your dream. Of course home ownership is part of the American Dream, but so is liberty and the pursuit of happiness, and if the home is too big and mortgaged to the roof, it will make the pursuit of liberty and happiness quite difficult.

I think there is a deliberate choice to make between early retirement and the standard sized house for your “socioeconomic status”. You can have one or the other, but not both. In other words, living in something significantly smaller than what your peers are living in is key to early retirement.

Again, unless you enjoy spending money on a large home and the things that come along with it, a home is basically only a place where you sleep and keep your stuff (more on that later). Realize that you could in principle choose between having no kitchen and paying, say $400, more per month. Those $400 could be spent on eating out every day. Now this is not a realistic example, but consider a that an extra bedroom might add $200 a month to the rent.

To become financially independent of a $200/month expense requires investments between $60000 and $80000 (see here why). This is the so-called latte-effect at the large scale expect that instead of a daily superfluous cup of luxury coffee, we are talking about a superfluous bed or bathroom that is rarely used. How many years will it take you to save this much more money?

I think that a good guideline per person for living arrangements is $200-300/month/person. In some places this buys more than other places. As far as I am concerned, the number is absolute. If I want to live in a “nicer place” it simply translates into a (much) smaller place and vice versa.

When I started out, I was paying about $275/month for a small room with a sink (I shared the kitchen, toilets, and showers with 18 other people). This was close to downtown of one of the more expensive cities in the world. When I moved out of that place, I moved into my very own apartment for $400/month. Then I moved together with DW for $330/person/month. We then made the mistake of moving into a house at $700/person/month. That lasted a year with stagnating savings as a result. We currently live at $237/person/month.

On the first day of the challenge, the idea is, therefore, to seriously consider whether your current living arrangements are optimal for early retirement. I put this on the first day, because it takes about a month to find somewhere else to live and move.

Of course some may be bound by mortgages (which may be underwater) or not having sufficient ready funds for making a deposit, and they may resort to just considering the move and start looking at a longer time frame.

For the rest, I think there are three things that matter.

1. Location relative to your work.
2. Location relative to your grocery outlet.
3. Cost.

So, the real estate motto is 2/3 true: It’s location-location-cost.

The method I tend to use is to go to craigslist and click on housing. Then I put in my limits: $200 minimum (because that removes a lot of useless search results) and $350 maximum. If you are two persons, you could put $400-$700, say. Also consider cohousing, room mates, etc. In particular, consider radical alternatives. We live in an RV for example. In addition some of the cheaper places may not be heavily advertised. We lived in the same place for 2 years before discovering an option that was $400/month instead of $660/month. Ask around!

What about buying? In that case I would use the same limit for the monthly payment. I do not think it is a good idea to consider the house you live in an “investment” unless you know more about real estate than the average person and in particular enough to speculate on its direction.

I would also not be too tid down to a particular city. Indeed, a frequent excuse is that “I need to live here”… Actually, unless you can document some need for a particular climate, say, you only want to live in a particular place. This want, then, comes down to paying extra vs retiring early. I pick the latter… to a degree. The one place I don’t want to live is Table Rock, Wyoming :-P ; mainly because we got stuck there on the interstate during a winter storm once.

Now that you have a bunch of potential addresses, it is time to find routes to work and groceries respectively. I use google maps. Enter the address of your potential new home and then click on from here and enter you work address. Google maps should give you a route. You can actually drag this route around to avoid certain streets, etc.

Since we are going to get rid of a/the car tomorrow :-) , I recommend checking to see if those streets are walkable or bikeable (e.g. no disappearing sidewalks or killer intersections). Satellite view at maximum resolution or the street view option is helpful for this.

If you live in a region with heavy winters, you will have to walk rather than ride a bike. In that case limit your maximum distance to 3 miles (will take about an hour to walk). Otherwise, I would say 7 miles tops. Perhaps you are tougher than I am. Walking a 6 mile round trip daily is certainly doable — I did it for half a year once, but I wouldn’t want to walk much further than that.

An alternative solution is to check out car commutes possibilities or public transport. While these cost money, something which is to be avoided, they may significantly expand your options. In that case use google maps to look for bus stops instead. Even if you are not going to move, try going through the craigslist/google maps exercise anyway just to realize that it is possible. Don’t worry. There are other ways to self-actualize than living in an expensive place :-D

Day 02: Decluttering and managing stuff [3]

I bet a lot of you were looking forward to putting your car up for sale today. Well, today I decided to be nice, but don’t worry. There will be at least one car gone by the end of the month.

Today I’m going to discuss the management of things, that is, what many of us refer to as “stuff”. It probably holds for most of you, myself included, that you have more stuff than you actually use. By extrapolation (technically induction), it therefore holds that other people has more stuff than they use as well. The cumulative mountain of unused stuff is a symptom of economic inefficiency. Inefficiency is what will slow you and everyone else down from early retirement or even prevent it.

Typical excuses for keeping stuff (around)

1. I need it. (Answer: Then why haven’t you used it for the past 12 months?)
2. I might need it. (Answer: Highly unlikely, since you haven’t used it for the past 12 months.)
3. I didn’t know I still had that. (Answer: Roll eyes.)
4. This was a gift from aunt Martha. (Answer: How about regifting it aunt Bertha?)
5. This [antique[ is worth a lot money. (Answer: Then sell it!)
6. I will just hold on to it a little longer. (Answer: How long?)

I’m sure you can think of other excuses.

The main problem here is that people have grown accustomed to acquiring stuff by buying it new from stores and forgotten all the alternatives. As a result, everybody on your street owns a blender that they have used maybe 10 times over the past year; everybody owns a ladder even though they have only been up on the roof once (I own a ladder, but I’m up there every other week); everybody stock a home library and a private movie collection (and maybe even a private cinema sized projector system); and everybody owns some kind of crafts/hobby supplies that were fun for about a month but which were then put on hold.

This wasteful activity stops right now 8-)

There is a major untapped resource here though. You might be one of the few people that actually have some desire to own a blender, if only for a short while. Instead of buying it (on sale, of course, everything is always on sale in this country, ugh!) get it for free.

Here’s how to get it for free. Use freecycle.org. Click on the link and see how it works. Then join. After you sign up you should start getting emails.

Your task for the week, should you choose to accept it, is to find one (or several) of your unused(*) possessions and OFFER it on freecycle. See what happens. If you do not have a bicycle, your task is to get one for free. Simply post a WANTED ad detailing your desire to get one. Oh, and if someone actually offers you a bicycle be sure to pick it up!

(*) A good definition of unused is anything you have not used for one year. If you have used everything you own for a year, then congratulations. You get a C. Move the time frame back to six months. Still good? You get a B. Move the time frame back to one month. If you’re still good, I have nothing to teach you. You get and A and you can skip this exercise :-)

You will find that most things show up on freecycle sooner or later. If you want an xBox360, we’re talking much later, but I did recently see someone offer a PS1 and I gave away an Atari2600 simulator I got for xmas one year (it was fun for 30 minutes!). Freecycle will also teach some valuable lessons about lifecycle management. Unless you repeat the stunt of our former neighbors, who put an estimated 10-15 large black trash bags of stuff (clothes, toys, …) out for garbage pickup during the last spring cleaning (Disgusting does not even begin to describe that kind of waste!), you will probably see that getting rid of stuff is a lot harder than acquiring it. We truly live in an affluent society, otherwise people would be knocking down your door to get your superfluous things. However, be patient, sooner or later someone will take it. If not freecycle, then craigslist.

The effects of this exercise is

1. Saving other people money.
2. Saving yourself money.
3. Thinking more deeply about future purchases.
4. Needing less storage and fewer bedrooms.
5. Having an easier time to move to a new place.

Don’t forget your task: Join freecycle. Give something you don’t need away. Get a bicycle (if you don’t already have one).

Day 03: Grocery shopping [4]

There are basically three big categories in a normal household budget that need to be severely modified to make retiring extremely early feasible. These are housing, transportation, and food.

Whereas I have already dealt with housing, I am still a bit reluctant to deal with transportation. I have this image of readers sitting clutching their steering wheel with a wild look in their eyes muttering “My precious! :-D

Therefore I’ll start with food.

People are generally recommended to eat a varied diet. I suspect that the general argument is similar to that of index fund investing: So many people are clueless about nutrition so if experts recommend eating a little bit of everything, chances are that nobody will develop any nutritional deficiencies — well other than eating too much. This I believe is a result of insisting on eating three larger meals a day despite NOT doing the hard physical labor that that meal plan was originally designed for.

During my first 3 years, I ate mostly lentil soup (lentils, onion, garlic, cheese, rice, carrots) and tuna sandwiches with lettuce or kale. This accounted for 75% of my cooking and it was certainly healthier than the ramen noodles and cafeteria food my colleagues subsisted on. I would also eat a lot of stir fry (beans, onions, carrots, apples, broccoli, rice).

Today we eat somewhat more interestingly. However, some lessons are still worth retaining, namely that by keeping to only a few meals, which together cover all bases, it is possible to learn to cook based on a small set of staples (rice, beans, onions). These staples are then bought in 10lbs bags.

Avoid preprocessed food. Personally I draw the line at canned tomatoes and bread. I would never buy sauces, powders, or frozen ready meals.

One will get used to eating just a few different kinds of meals surprisingly quickly and be as happy about eating as someone who eats out all the time. The great thing about this is that being invited somewhere for their regular dinner is a real treat. Those who eat a standard diet require much more to be happy about eating something they don’t usually eat. Of course if gourmet food is your thing, then maybe food is the area where one should spend a little extra effort or time (and maybe even money). Meals can be varied by adding loss leaders as the supermarket offers them up.

Many have way too many kitchen gadgets. See this post on how to reduce your kitchen to something more useful without having to dig for everything.

Before switching to a staples based dinner plan, I recommend getting rid of all the weird things in your cupboard. The best way is to not buy anything until your last strange ingredient is gone. Just imagine that there was an earth quake and the stores were closed for a week. How would you do?

The alternative is to give it away on freecycle. Yes, they take food.

I highly recommend flipping the standard western idea of basing all meals on milk and meat around. Consider going vegetarian.It is much less expensive both in terms of food cost but also in terms of reduced medical costs (cholesterol and all that). Also it is very hard to stay overweight on a vegetarian diet. The emphasis on carbs also results in more energy. Meat and milk is generally not healthy to eat (but I do admit it does taste good!). In addition, short of not having children, going vegetarian is the most effective way of reducing your impact on the world’s food supply. It takes 17 grams of plant protein to make 1 gram of meat protein (and a huge amount of water as well). The problem is that we, the rich people of the world, can easily afford to price the poor people out of the market, e.g. paying 17 times as much for our protein, and that results in starvation. Incidentally do not throw away leftovers. It is wasteful and in light of the above also morally wrong.

So consider meat a treat. Besides, leftovers without meat tend to store longer.

I gave up on the whole milk idea when I moved away from home. The idea of picking up a milk every six days (in myCountry the regulation against preservatives is pretty tough, so milk tends to expire within 6 days) was too inconvenient.

One way of not buying too much unneeded food is to strictly adhere to a grocery list. This is not optimal though. Using a list leads people to buy food even when it is not on sale. I only buy food when it is on sale! In general DW buys our food and she is not as stingy as I am, so we spend more than we have to … the joys of already being financially independent is that I can spend surplus money on things like that … laziness :-) Anyway, a much better trick is to shop on foot. That means bringing a backpack and walking over to the supermarket instead of driving.

I know that sounds outrageous. My precious! Probably as outrageous as the idea of just driving out to get something whenever one needs it still sounds to me. But put on a backpack tomorrow and walk over to the nearest supermarket. I have always managed to live within a thirty minute walk from the nearest one, and chances are that you do too. You are now limited by the size of your backpack . Also the desire to just head out and get something rather than trying to improvise a recipe without that most likely irrelevant ingredient will be stronger.

Incidentally you can bike too depending on what kind of load you can handle on a bike. I was always set up to handle more on foot (about 40lbs) than on the bike (about half that).

Food limit: Depending on where you live: $50-75/person/month.

Jacob comments: This will get you started: Buy a 10lbs sack of rice. Onions, carrots, kale, raisins, soy sauce, olive oil (large one), and black beans (the big bags are at your ethnic grocer). Cook the rice and the beans. Slice up the onions, carrots, and kate. Fry the kale, add the carrots, fry again, add the onion, fry, add the raisins, beans, rice, and soy sauce. Mix around. Done. If nothing else, try eating this for a few days a week from now on until you perfected the mixing ratios.

Day 04: Drop the cell phone plan [5]

There was a time, a simpler time, perhaps 10 years ago(*), when people were able to make detailed advanced plans to meet their appointment to do a certain thing at a certain time. For instance, several people would schedule to meet at a certain time and place and they would all manage to do so. Or, say, a person could be given a list of groceries to pick up and the person would pick up the groceries. All this worked on a combination of small pieces of note paper and the ability to follow instructions.

(*) Fun fact: To put 10 years in perspective, it is estimated that out of the species alive at the end the of the 19th century, about 20% of them had gone extinct at the end of the 20th century. Hence 2% of the planetary bio-diversity is lost every decade.

Today, cell phones have replaced these skills. In fact cell phones are now considered a need and have even begun to replace basic parenting as some parents are beginning to use cell phone tracking to keep track of their kids. Is that just me getting old or is there really something fundamentally wrong with that approach?

Regardless, cell phones are not really needed. In fact phones are not really needed. For years I relied on email (I did have access to a public phone in the hall in case of emergencies) and now I have skype for talking. Data access is a need since I do use it for work, volunteering, writing the book, writing a blog, etc. but cell phones would merely be a nice to have feature. I would therefore suggest dropping it altogether or replacing it with a land line with free local calls, etc. Alternatively, if you must, get a cell phone with a prepaid plan and wait to use it until you break your leg; surely telling someone that you just saw a cute bunny rabbit on the street could wait until, say, next year or if you are more merciful: let people read about it in your memoirs. And please do try to get back to that whole “setting up appointments to meet”-deal.

Is your cell phone worth it? This is easy to answer. Multiply your monthly bill with 300. Then divide this with your monthly savings rate. This is the number of months, that your cell phone is keeping you from retiring e.g. If your bill is $50 and your monthly savings is $500, then your cell phone is delaying your retirement by 50×300/500=30 months or almost three years.

For the geeks, the 300 comes from the principal 4% annual withdrawal rate, hence 12/0.04=300.

My apologies for wasting the time of those without cell phones, both of you. I mean it.

Jacob comments: In light of the comments below (and some private emails), there is a safety concern when it comes to being out of communication range so to speak. The way to get around this is to make detailed plans, tell someone where you are going and when you will arrive, and make sure that someone sends out a “rescue team” if you’re not heard from with X hours. In addition, never get “stuck” anywhere where you depend on reaching your destination in a certain time “or else”. This would include heading out in the cold in clothes that is not warm enough or heading out in the heat without water, and so on. I think cell phones creates a certain risk management hazard in that they encourage the lack of contingency planning and common sense as well (see for instance this post on winter clothing) e.g. an “I got my cell phone – if anything goes wrong, I’ll just call”-mentality. There are basically two schools of risk management. The first school says that risks can be managed if one adheres to strict procedures. The second says that risks can not be managed because there is always some unknown unknowns that were not accounted for and that the best risk management is not to take chances and remain flexible. I belong to the latter school (Wall Street belongs or is that belonged to the former).

Day 05: Find a free hobby [6]

Hobbies can, as far as I can tell, be classified into three groups. Most hobbies belong in the first group and that can be detrimental. The challenge is therefore to move into the second group and maybe eventually even into the third group.

1. From the time I was 12 until I was 24 I spent practically all my money on enjoying the bleeding edge of computing. I upgraded my system every two years or so and so I have owned more than 10 computers. This was not all. I have also spent money on cameras, hifi equipment, telescopes, outdoor equipment, fantasy knives, softguns, and so on (can you tell I was a nerd?). Many other people spend their money on partying every weekend or going out to eat (that is definitely a hobby!). In the end we all have the same to show for it: Nothing. We have been entertained, but I honestly put the value of the entertainment I received 5 years ago close to nothing. On the other hand, the investments I made 5 years ago give me almost unlimited freedom today. When I decided to become financially independent, I realized that that habit had to be replaced with something else.
2. Enter the “free hobbies”. There are also hobbies that cost nothing or are in a sense close to price neutral. Learn Ancient Greek, play chess, start a vegetable garden (the costs are cancelled out by not having to buy the vegetables),… I, being a nerd, decided to become a competent system administrator and spend my time learning everything about the unix operating system. I also got very involved in geopolitics spending endless hours on the internet and reading government reports, etc. It is not hard to find free hobbies and in general it is possible to develop an interest in almost anything. The reason is that things are mostly uninteresting simply due to a lack of understanding of the hobby. Now, it is possible to remain at the free-passive state forever, but it is also possible to go further and I highly recommend it. This leads me to stage 3.
3. Giving back. What I mean by this is to engage with other people. My interest in system administration meant that I got to run the department servers where I worked (instead of TAing lazy students). My interest in geopolitics actually lead to a contribution to a book. I am definitely quite proud to be published in two different fields — not many people do that anymore. I also volunteered for the third rail of sustainability (overpopulation).

Once you develop a passion for something that is free and maybe even rewarding, not necessarily strictly remuneratively, it is unlikely that you will have time to buy things because you are bored. It is also immensely more satisfying than shopping. It might even possible to turn it into a career.

Speaking of which: Unlike so many victims of consumerism, your life really does not have to comprise a job and a TV addiction. Find something that is highly meaningful to you and which does not cost a lot of money to engage in, and you will be a lot happier than the rats in the rat race.

Read this post as well. Also check out the incomplete list of hobbies that make you money (and some that don’t).

What is your current hobby costing you in years? Multiply your monthly outlay by 25 and divide by your monthly savings rate. E.g. if you save $1200 a month and spend $120 on your hobby, it is costing you 3 years! If you only save $300 a month, your $120/month hobby is costing you 10 years! I trust you to run your own numbers.

Day 06: Clothes [7]

The most effective option to save money on clothing clearly is not to buy any, hence this is what I would recommend.

This strategy can work for several years because most people, myself included, simply have way too much clothing e.g. more than what we can wear at one time. If you have clothes you can not wear at all, get rid of it. Someone else can probably use it.

Now, your average piece of clothing should survive the laundry cycle about 100 times, maybe even 200. If you have 10 shirts, that’s 1000 cycles. Even if you only wear them once before you wash them, that’s three years. This should be sufficient to get well on the way towards financial independence. Some people have even more years worth than that. Consider that many things can happen during this time. You might change your size (usually always a bad idea) or the clothes might go out of fashion. Having less clothes makes it easier to keep up with current trends if you are into that sort of thing. It also means that you can get a new piece more often. This follows from Lanchester’s square law, also applicable to tank warfare.

For the rest of us, I highly recommend sticking with “classical bland”, this means either gray or navy for the guys. For the girls like with most things, it’s more complicated.

But I guess that did not come as a surprise. Oh, I slay me! :-D

To make clothing last longer, you should seriously consider doing laundry less often than that as it wears down the fiber. One way to wash less often is to change clothes appropriate to the task.

You should also learn how to mend holes. I think that pieces that are not directly visible, socks, underwear, anything that goes under the top layer basically should be mended, patches, etc. until it disintegrates. You can pursue the same strategy with towels and bedsheets. For instance, if you only use one towel, it lasts about 4 years. If you only use one (old) bed sheet, it lasts about 3 years before it rips. Quality may vary. Of course this is anecdotal.

Now, suppose after 2-3 years that you actually did run out of, say, pants. What do I do? I would get underwear and socks new, but everything I would get used. Start with freecycle, then move up to thrift stores, and then move on to extreme sales events at outlet stores. Going beyond that constitutes failure, in my not so humble opinion ;-)

In my experience, homemade clothing does not really save any money.

Now it may be that you work somewhere were you have to look expensively dressed because someone in corporate thinks it increases your productivity or inspires customer confidence. This often requires paying the part (out of your own pocket, naturally). Again, look for sales, but do not feel too bad about this one: You won’t need those clothes in retirement, therefore they do not delay your retirement by the standard calculation other than making your savings rate smaller. They do not enter on the factor 300 numerator though.

Day 07: Going car free [8]

Everyone needs to live somewhere, but not everyone needs to drive somewhere, especially not those that found a place to live that is close to work on day 1. Next to housing cost, transportation costs are the second biggest source of expenses.

The average American spends 18% on his income on transportation.

That is 0.18×12=2.1 months a year of work. That is a lot of time that could conceivably be used for something better.

Assume he also spends an hour daily in his car commuting, then that is 250 hours a year, assuming 250 working days. That is 1/8 of the working day on top of the working day. Hence, that is 12/8 = 1.5 month in addition.

In other words almost 3 months a year goes into being able to drive back and forth from work. Hence if you would otherwise calculate 6 years until retirement, then if you own a car, you will only be able to save 9/12 as much, so your time until retirement would extend by 12/9*6=8 years or two additional years. Correspondingly, if you calculate 12 years until retirement, then you are really looking at 16, or four more years. Conversely, if you were otherwise looking at 16 years, then giving up the car will reduce your “sentence” to 12 years.

Not owning a car is therefore an extremely helpful measure towards early retirement. If you want to retire extremely early, it is almost a prerequisite.

Not owning a car comes with other benefits. First you will save money on exercise. Driving your car over to a gym to run at a treadmill and then drive back again is inefficient at best. If you ran or at least walked or biked to and from work not only would you save the money for the car. You would also save the money for the gym. I know that very many people past college age completely ignore their level of fitness. It seems like a degree and a career also serves as a ticket downhill the path of physical decline. Naturally if you are going to retire early, it will be sad to sit on the couch all day due to lack of “energy”. Commuting under your own labor is a great way to avoid this.

I am not especially talented in the physical department, yet I would consider it normal to, without preparation and prior training other than your daily commute, to be able to run 10 miles, walk 30 miles, and bike 50 miles. Yet many think these numbers sound insane. This suggests a large chasm in terms of frame of mind between a driver that gets around using gasoline and a walker, a runner, or a rider that get around under his own power.

Walkers easily go 4 miles by foot. Drivers get in their cars to get from one side of the parking lot to the other. Neither quite understand why the other is so crazy, when it is so easy too …

So this is directed to those who are still attached to their cars. Once you get off of your addiction, you will find that it is easy to go without it too. Yeah, I don’t know how I manage live without being addicted to cigarettes, but I actually feel pretty good about it. As with all things the most trouble usually comes when you try to do things the new way by thinking in the old way e.g. “it is so hard to walk 2 miles to the supermarket because I need a cup of cream for this recipe and I don’t have any” – what a terrible life to live. You will automatically plan ahead for these things so the problem will never appear. Conversely, a walker in the city will not have to stand and wait 15 minutes for a bus that is going to move him 10 blocks.

But what about the children … they need … They need to live close enough to their school so they can ride a bike or walk or take the bus. Good habits are best started early. Consider a trailer bike. Consider walking them to school or at least to the bus. When I was a kid I lived 2 miles from my school, and my mom walked me back and forth for the first year. When you are retired, you will have time for this — it is a meaningful thing to do!

At least, in my opinion, better than working for more years so you can drive them back and forth in a van.

Now, if you are good with cars or motorcycles, there is an alternative. It is possible that you may buy “fixer-uppers” and resell them to recover most of your transportation costs. This is an enviable position to be in. For most of us, we will have to get a bike or take the bus.

Incidentally, has anyone managed to procure a bicycle for free yet?

Jacob comments further: Car ownership has at least the following costs. Some may not have all the costs.

Depreciation, leasing, or debt servicing costs. Leasing or debt servicing costs are relevant if you do not own your car outright. If you own your car outright and you intend to replace it, depreciation costs become relevant. For instance, $12000 for a car that lasts 10 years comes to $100 a month. That requires $30,000 in extra savings. Gasoline and insurance. These are unavoidable if you want to drive your car anywhere. Opportunity costs from sitting behind the wheel when you could be exercising. Health costs or lack of energy from lack of exercise. Buying into an unsustainable model. Oil is not going to last forever. The IEA, which is the most optimistic kid on the block, predicts permanent decline from 2020 onwards. Drivers will likely get priced out of the market (if a market indeed still exists, oil holding nations may simply decide not to sell anymore and importing nations may lack the resources to secure these resources by force or they may simply fight each other). In 11 years it would thus be unwise to have grown physically, mentally, and economically accustomed to $3 gasoline as this will not be available. Note this horizon is slightly longer than extreme early retirement, but it is still worth planning ahead. Green house gas emissions. The US uses 25% of the world’s oil and about a quarter of that goes to transportation. Global warming is now considered a virtual certainty and it is considered extremely likely that humans are a contributing factor. The implications of global warming are enormous. Taken with the International Energy Agency’s scenarios around 70% of all species could go extinct within the next 100 years (We already lost 20% over the last 100 years). Of course the horizon here is 20-100 years which is even longer.

Day 08: Get engaged! [9]

No I’m not talking about getting married. I’m talking about finding something that motivates you: Perhaps your calling, what you were meant to do if you did not have to go to work every day to support your … uh … lifestyle ;-)

I found that once I found a free hobby, the more I focused on it, the less money I spent. The problem with our society is that we have basically been conditioned and programmed by marketeers to equate often pointless consumption with rewards or  entitlements after hard work. It is simply the only sanctioned way feeling good. This can easily go to such an extreme that the preferred way of feeling good about oneself involves buying some needless stuff. To pay it off consumers go to work the next day to manufacture stuff for the next consumer that comes along and needs to feel good. This is the very definition of a consumer driven economy. It has little other purpose than building things for people to buy things so they will keep working.

The conclusion is obvious. If you want to stop working, stop behaving like a consumer.

I find the most engaging hobbies to be the ones that create value for others. Writing this blog is a hobby of mine and presumably it creates enough value for others to read it. The time I use to write, and respond to comments and emails (write me at jacob at early …. ) is time I don’t spend shopping. Hence, when filling all one’s spare time with meaningful pursuits takes away all the time one would otherwise spend spending money.

A frequent lament though is the lack of time and energy to pursue a high intensity hobby. It is sad when work sucks so much out of so many people’s soul that they have no energy to do anything else. If anything this is the death spiral of the consumer economy. People work hard. Consequentially they have no energy and thus they do the easy thing: They shop, watch TV, and eat junk food. This takes away their money and leaves them without money as well as the mental or spiritual energy that would flow from being engaged in something important. Bad food and lack of strenuous physical exertion also atrophies the body and makes it sick.

This consumer-work spiral thus have to be shunted and eventually exited all together. Start finding something you can identify instead of work. This is psychologically very important and it is one of the things that took me the longest to find out myself. Attaining six digit savings is easy compared to this! Anyway, when somebody asks you “what do you do?”(*), answer with your hobby. If you don’t have a hobby or a calling (which may be your job) answer, you are still a drone — I am Jack’s middle manager. If this is not the case, start identifying with something else and spend a few hours a day doing it.

(*) People in a consumer driven society generally identify with how they earn and how they spend. Rarely do you see anyone identifying with what they do outside of work or by what they believe in.

Day 09: Budgeting Day [10]

I see no need for detailed budgets or tracking expenses. In my world there are basically two categories

Money I spend Money I keep There is to me no discernible difference in terms of how I spend the money, whether I pay by credit card or whether I pay by cash. Spending is by and large a rational process so I have and offer no tricks or tips in the sense of whether using credit, debit, notes, or coins only, changes spending behavior.

If all other sources and possibilities to solve my problem have been exhausted and I absolutely have to buy something to solve it (failure!), I look on the price and calculate what my depreciation cost is. For example, I will look at the cost of buying and try to estimate the return from selling and divide the difference by the amount of use I intend to get out of it. This process will yield different numbers for different products. Then I pick the lowest number. Note that sometimes this is not a strictly economical calculation.

These numbers for all my expenses should be seen in relation to category 2, the money I keep. The money I keep quickly turns into investments, that is, productive factors that pay me.

In other words, when I see $100,000 in category 2 money, I don’t see it the same way as category 1 money. $100,000 in savings/investments means an income of $4,000/year, hence translated mentally, $100k means $4k/year.

Conversely, $4k/year means $100k. Alternative, $4k/month means $1200k. Having that amount translates into a money stream and this money stream is equivalent to a salary in the sense of a job: except I don’t have to work for it.

All category 1 expenses are therefore seen in terms of how large a principal I must accumulate to have them paid by interest from the money I keep.

Money I keep, therefore, represents freedom. I value this very highly. To compare this to the spending category, I estimate the monthly cost of spending on some item, and then multiply it by 300.

It is quite possibly that it is this enormous multiplier, the factor 300, that discourages people from saving for passive income. Saving $30000, after all, “only” results in 100 bucks a month and saving $30000 can take years or even decades when one is not aggressive about it. In that sense not-saving creates a double-whammy. Conversely, being fanatical about saving also works the other way, e.g. I’m paid a little over $30 an hour for freelancing. This means that if I can save $9000, it means I don’t have to work for an hour each month. Once that is cleared, I start saving for the next hour of liberty.

Hence, if I want to purchase something that will cost me $5 a month, I do not see a $5 price tag. I see that category 2 needs to be boosted by $1500. Suddenly $5 does not seem so trivial anymore. On the other hand, paying $4000 for something that I can sell for $3500 and that will last for 15 years … that is only $2.7 a month.

This means that price tags become irrelevant. All that matters is monthly expenses and the size of the principal. I always try to decrease the former and increase the latter. When they meet, you have arrived.

Day 10: Calculating net worth [11]

It seems that everybody calculates net worth differently. For extreme early retirement or financial independence, there is only one way to do it.

The only thing that matters to your net worth are assets that can easily generate income. Sum up the total of these categories

All savings accounts and checking accounts. All brokerage accounts. All real estate you own that you rent out. If any are mortgaged, subtract the debt. Do not include the following

Any kind of tax-deferred/locked retirement account (unless you are older than 55). The house you live in. Cars, boats, airplanes, or other big ticket items (unless you rent them out). Bling-bling. Now compute your expenses level. If you are a home-owner that does not own your home, the mortgage payment is an expense. If you own-own your home, your expense level should be lower.

If you have any kind of pension coming in, subtract that number from your total expenses.

Calculate your annual expenses. Multiply this by 25. Is it lower than your net worth? If yes, congratulations, you are financially independent and historically speaking you can go for a few decades without a job. Now multiply your expenses by 35. Do you still qualify? If yes, then historically, you could go on forever.

If either is a no, then you still have work to do, literally. Work hard to maximize your networth while minimizing your expenses. For most people the latter is far easier since the leverage factor is in the hundreds e.g. $100 saved per month translates into $30000 less in retirement requirements.

Day 11: Connecting your stuff with your neighbors [12]

… and all the other usual suspects: friends, family, loved ones, colleagues, and the long-lost relative of your grocer’s favorite shoe store’s distributer’s son.

On day 2, I recommended getting rid of a lot of your unused stuff, that is, stuff you haven’t used for the past 1 months (books and DVDs were allowed a slightly longer half-life, about a year). The point of that operation was to make it easy to move into smaller as recommended on day 1 and thus remove the main cost of having too much stuff namely, indirect housing costs.

It is possible to go further than that. Whereas the above may be thought of as an inventory reduction, the next step is to take inventory management to the next step, to something akin to the Japanese Just-In-Time except what we’re going to do here is to store some or our things “off-site”.

I suppose you’re familiar with the idea of borrowing things from your neighbors. But have you ever systematically done so? Set up a system so that each person (who is interested) provides a list of what they have but do not use every day. This could be tools, kitchen utensils, DVDs, and even bicycles.

These lists are shared and then people borrow from each other following the standard rules of borrowing:

If you break it, you replace it. Return it in a better or as good as condition as you got it in. This works particularly well for DVDs which is probably also the easiest to set up. You very likely have the same taste as your friends and together you will have a better selection than the library and it is very likely that the exchange will be more effective than netflix et al. as well.

If you don’t feel like making lists, you can do “intermediate scale freecycling” locally. Reserve a table at work for things you no longer need and put up a sign that says “free” and put things you are willing to give away there including weird ingredients, paperbacks, etc. Maybe others will get the point and the idea will take off.

The last option is to lend things out on a semi-permanent basis e.g. give things away with the caveat that you can recall them if you ever feel like it.

It goes without saying that the first and the last method requires some upstanding friends. Normally this will develop automatically. People who do not respect the system and other people’s things will eventually get excluded from the system as in “Nah … you can’t borrow it today because (insert poor excuse)”.

Day 12: Establishing a savings account [13]

It is vital to the early retirement plan to be able to access savings in your retirement. For those younger than 55, saving in plans, which presume that people should retirement no sooner than age 59-67 (depending on your country), is thus of little use.

That is to say, it is still useful to some extent but not before actually hitting those ages. If you are older than 55 you are therefore in luck but for the rest of us, we also need a savings plan that takes care of retirement from age 30 to age 60ish. This has to be done is a taxable account.

Having implemented all changes of the makeover so far, it should be possible to save at least $500/month… more if you’re making more than minimum wage ($12000/year). Those ambitious enough to retire extremely early should be able to save more as well as earn more.

Initially, it is important to stay motivated. I wrote a post last year — one of my first — on how to compare your savings to big ticket items on a regular basis to stay motivated. To wit, being able to buy something worth $10,000 makes one happy on a daily basis, or at least as often as one thinks about it, whereas buying it will only create happiness for a few weeks.

It matters very little whether your saving is done in a savings account, a checking account, a money market, or even under the mattress. As long as your cash position is less than $10,000, the difference in interest rates is minute. Besides, keeping a non-working cash position is useless for early retirement. The so-called emergency fund is only useful for workers who live above or close to their means, but for extreme early retirement you live at less than half your means. In a short while we’ll start building a position in a brokerage account. This will be accessible to be liquidated in case of any “emergency”.

Jacob comments further: Pre-retirement for an ERE strategy, an emergency fund is less relevant. You will be saving 50-75% and depositing checks to your broker account (these are generally insured to very high amounts) every 2-4 weeks. Even if they market declines, all you need to do is to sell your most recently acquired position which will not have declined as much. Say you just bought 1500 worth of stock last month, and you get laid off while the market at the same time goes down 20% (that’s quit a bit for a month). Then you have $1200. If you sell this, you have over 2 month’s worth of living expenses. You can sell the previous month’s investments for another two months.

Most people can’t do that because they keep all their savings in retirement accounts with the rest of their networth sitting in equally untouchable home equity. This leaves very little flexibility. The difference in planning for ERE is a difference in kind, not a difference in degree. The normal rules don’t apply.

Post-retirement, an ERE strategy will focus on dividends and corporate bonds. Dividends from select companies are MUCH more stable than earnings or market follies. My dividend yield is down about 10% thanks to “these times”. It is nothing to worry about. Furthermore dividends tend to rise faster than inflation in many cases.

Day 13: Insurance [14]

Come on! What else did you think day 13 in the makeover was going to be about? :-D

On day 12, several people mentioned the importance of an emergency fund, so with that idea so firmly ingrained, it should be easy to get the insurance issue out of the way.

An emergency fund is essentially a form of unemployment insurance where you self-insure. This idea can easily be taken further. Consider for a moment what else could be self-insured? Your house? Your bicycle? Your stuff?

Think of insurance as a money transfer from people who get into accidents less often to people who get into accidents more often with insurance companies taking a cut (this is called the combined ratio) of typically 10% to arrange this transfer.

Would you voluntarily take this offer? Only if you are more risk prone than average (say you eat 5 double cheese burgers a day, smoke, and have an annual car accident) or you can not afford to cover the loss if the event happens to you or both.

If you can self-insure and work on reducing your risk below those of the average insured person (insuree?), you will be better off statistically than those who carry insurance.

In other words, if you self-insure, YOU get to invest the float and receive the interest. If not, Warren Buffet gets to do it (if you’re using Geico that is) and he’ll keep the interest for his shareholders.

This is of course not a binary decision. For instance, due to the prevalence of frivolous lawsuits we carry liability insurance. You never know if someone is going to stumble on your door step and then decide that their clumsiness was your fault. We do however not insure our stuff as this can easily be replaced many many times in case it gets destroyed(*). For my health insurance, I carry a HDHP, which has very low fees, because I carry all risk from $0 to $3500/year after which the insurance pays the rest. Thus I’m protected from catastrophic loss but I have a fairly large economical stake in my health. The money to cover this comes from a HSA which can be increased tax-free by $3050 per year. Thus in the worst case scenario, I will be paying $3500/year every year. Even $100,000 in savings will sustain that for 29 years, so there’s little to worry about(*).

(*) Relative to say having your health insurance through your job and worrying about getting so sick that you eventually get laid off unable to work after 1.5 years thus losing your nice corporate health care, and then what?

Day 14: Investing for early retirment - Part 1 [15]

If you plan to retire early, you are eventually going to become a “professional” money manager as in a sense you will be managing your money for money. You will, of course, be operating on a much smaller scale and so you will have a much easier job than a real professional who is subject to regulations and other restrictions.

Note: The investment overview now lives on the ERE wiki and covers more strategies than described below. Now, you could pay some “25 year old fund manager with a bachelor degree from a top tier university” 1% to do this. However, this means that instead of multiplying your monthly expenditures by 300(=12/0.04) you must multiply them by 400(=12/(0.04-0.01)). This is akin to giving Wall Street a third of your money. While this may be an acceptable solution for someone planning to work for 30 years, letting other people manage your money significantly impacts the time horizon of early retirement: You have to work 33% longer before you can pull the trigger.

Learning to manage your own investments is not easy and you will have to spend considerable time educating yourself. As a science, investment has not progressed beyond description and analysis(*). As a predictive science, investing is very much lacking. There have been some statistical inroads but beyond that investment theories generally seem to read as someone’s autobiography.

(*)It is interesting to know that formal education in investing tends to focus on description and analysis while popularizations seem to mainly focus on theories.

And that is exactly the point. If everybody did the same thing, investment growth would be naturally limited by GDP growth and GDP growth would be naturally limited by world growth. Yet pick up any book (or blog) and you will find people happily extrapolating exponentially into the sky, the DOW 50000 kind of thinking. I call this kind of thinking “stupid” :-P

You may stop for a moment to meditate on what the popularization of a given investment strategy will do to the returns of that strategy. Indeed, it will significantly depress the historical returns and it could even make them negative if you get in at the end.

I think it is important that each player or agent (and you will become one) in the stock market use a strategy that is entirely tailored to the individual. It will take time and “investment-introspection” to find this strategy e.g. you won’t know if a particular strategy will let you sleep well until you tried it.

I can tell you which strategy I am converging towards. Of course to put this in perspective you also have to know what kind of emotional or behavioral stance I take.

I do not believe the stock market is some bonanza to long term automatic wealth. Hence, I do not buy&hold forever. In terms of market cycles, I never believe that these are special times. I see investing as paying for a future cash stream. My discount rate is 3%+plus inflation. (I think for the experts, this will tell you how I go about implementation right away. If you don’t know what I’m talking about, you HAVE to learn … or pay someone who did it). I am far less concerned about the market value of my portfolio than I am about the future and security of my cash stream. Here are my buying and selling rules.

For any given company I will set a minimum entry point yield, typically 5% for companies and 10% for REITs. I will enter a position gradually. Buying stocks in round lots of 100. I will also set exit point yields, typically 3% for companies and 5% for REITs. Once the stock price moves close to the exit point, I will pursue two strategies depending on the stock. If it is a volatile stock I will sell calls with a strike price around my exit price. If it is a nonvolatile stock or it does not have options, I will set a limit order at the exit price. If there are no stocks to buy, I will buy short maturation (next year maturation) single issue corporate bonds rating above junk. My portfolio strategy is as follows

I will own no more than 20 different companies. This allows for substantial diversification while still making it possible to follow each company individually. No company should exceed 10% of my total holdings. I will not rebalance if it happens, but I will not buy more. I will own mainly US companies. It is easy to get international exposure by owning transnationals. My international exposure is in my 401k/IRA (currently less than 10% of my holdings) because it makes doing taxes easier. I am willing to sacrifice returns for this. I follow no strict asset allocation. My asset allocation is determined by my trading strategy above. For the same reason I do not rebalance. When it comes to buying stocks, it gets tricky. Usually there are 10 or more criteria of what makes a perfect stock. Unfortunately, all of them are never fulfilled. This makes pulling the trigger a judgment call. When it comes to pure screen metrics, I like a P/B below 1, but I am willing to entertain higher values. I also like trailing earnings yields higher than 10% (P/E<10), but again I am willing to entertain lower values. I think debt/equity ratios are also also important(*). Ideally this should be 0, but often you don’t get a deal like that.

(*) Which is more impressive? Assets of of $200000 with $0 in debt or assets of $500000 with $300000 in debt? Both have the same net worth (equity), but the first have a debt/equity ratio of 0 whereas the latter have a debt/equity ratio of 150%. Hence the former is a much more financially secure/stable person/company.

See how this process works. Relying strictly on measurable metrics is like hiring a person based on their GPA. It may give you an indication, but it does not give the whole story. The important idea is that the numbers are not the end all but their give an indication of where to look and where not to look. To get a better idea, I read through the 10K and last few 10Qs and try to find some conference call transcripts to get an idea of what kind of management the company has. In general though I read as much as I possibly can about the company. As with anything, the more you read the easier it becomes to understand subsequent readings.

My 5 biggest positions as of today are: WFC, GE, WAG, HRP, and UPS. You will note that these stocks have been kicked lately and that they are heavy on financials, real estate, and transports. These are bad stocks to own going into a recession but pretty good going out of one.

For further reading, I recommend the The Dhandho Investor and The Intelligent Investor. I would start with the first. For those who can handle light college level math (should be everybody in my opinion), Investment Science is quite good!

Incidentally ,I believe it is superior to invest within your field of competence whether it is the stock market, real estate, or plumbing. I use the stock market, but you may find the other things work better for you. This is where the investment-introspection I mentioned above becomes important.

Day 15: The first two weeks of the makeover [16]

The first two weeks of the makeover covered the most important aspects of the ERE strategy. Out of those 14 items, the most important are housing (day 1), transportation (day 7), and food (day 3). Ignoring those and focusing on the rest will only bring about cosmetic changes.

In fact, if I were to create a quiz, and actually I am, housing would be worth 30 points, transportation would be worth 20 points, food 10 points and the other 11 subjects about 4-5 points each.

You can grade yourself: 90 points scores an A, 70 a B, 50 a C, 30 a D and 10 an F.

Day 1: Finding a place to live Day 2: Decluttering and managing stuff Day 3: Grocery shopping Day 4: Drop the cell phone plan Day 5: Find a free hobby Day 6: Clothes Day 7: Going car free Day 8: Get engaged! Day 9: Budgeting Day 10: Calculating net worth Day 11: Connecting your stuff with your neighbors Day 12: Establishing a savings account Day 13: Insurance Day 14: Investing for early retirement – Part 1

So let me ask my favorite question: “How well do you think you’re doing sofar?”

My second most favorite question is “if you were a tree, which kind of tree would you be”. It has no bearing on this subject or any subject at all for that matter, but feel free to answer it anyway for extra credit :-D

Day 16: The stuff you actually keep and use [17]

One of my core philosophies is to maximize the quality of things I spend a lot of time with/in/on and minimize the quantity of things I do not spend a lot of time with/in/on.

This way the reduction in quantity pays for the more expensive quality. This works well because in our society, quality is often underpriced and quantity is overvalued. What I mean by this is that it is easy to earn enough to afford high quality because wages are so set so as to be allow one to afford enormous quantities. Quality is also cheap because people do not put value on it.

One example: Six pairs of shoes at $20 that last 2 years each vs one pair of $120 shoes that last 12 years. Which is better?

Obviously the latter. The cost is the same, but you are wearing something that is better constructed for a good many years. In this case it is even quite likely that the lifetime can be extended. Other high quality items may command a substantial used price. For instance, a watch acquired for $200 new will have a used price of very little five years later. A watch acquired for $800 will probably sell for close to the same five years later. Which is less expensive?

I think the best strategy towards keeping and using nice things is to approach every purchase with two objectives in mind

Plan to keep everything you own forever(*) Consider everything you own for sale at all times. Minimize the use of resources. (*) Here forever is some combination of the lifetime of the object and a reasonable estimate of what that lifetime could be. To stay with the shoes, they can last 10 years. Appliances can also last 10 years. You can also get shoddy workmanship that last far less time, but that is no excuse.

This will force you not to buy anything needlessly and at all times know its value (to you) while minimizing planetary impact. Okay, the last is just one of my values. If you want to pollute I guess you can. Your grandchildren won’t stop you. Anyway …

This does not mean that you should go out and start replacing everything you own. You already own something that does the job adequately. You probably have several spares ready too. However, once you really run out of something essential, put down the money and get something, preferably used, that will last you a long time and provide superior qualitative use value. Over time, consequently, your stuff will increase in quality and decrease in quantity.

Jacob comments: In terms of buying new and used, you must consider the difference between purchase and selling prices and then divide this by the utility or happiness it brings you. It is this number which must be minimized.

Day 17: Maintaining and repairing things [18]

Back by popular request, the 30 day Makeover continues … at least as long as I can keep it going. As I have explained before, it mostly comes down to housing, transportation, and food. There are really no magic tricks other than discovering that you will be just as happy — but probably more motivated — if you spend 20% of what you’re currently spending while saving the rest.

For any new readers, you will find a summary of the first 14 days on day 15, where I used the pro-blogging trick of saving time while gaining stickiness at the same time :-D .

Today, I’m going to talk about repairing and maintaining things. As a society of “use and throw away” these skills and habits have entirely fallen into disrepair. What’s the point of maintaining something when it will be replaced by a newer and more fashionable item next year? Often items are not even built to be repaired as they use either sophisticated electronics or molded plastic.

The challenge thus comes in two parts — and I can empathetically state that this is the area that I find to be the most challenging.

You must acquire things that have been constructed to be repairable(*). You must learn to do some or most of these repairs yourself. For the first item, I’m not and I’m never suggesting that you toss a functional object just to buy another object. That is just wrong! You wouldn’t toss a pet either just because you lost interest or found something cuter, right? Ownership implies responsibility: You were responsible for digging raw resources out of the ground and now you’re responsible for getting the maximum use out of the object, so there … [rant over]. Such items are often built using “traditional” methods dating back to the era before chip electronics and plastics. In other words, if it’s built of metal, wood, or natural fibers, it is typically repairable. For the second item, you must get in the habit of maintaining your stuff. This usually means cleaning after use, storing things well (something I’m not very good at), and replacing or repairing breaking parts before they start breaking down other parts.

The easiest way to get into this “repair-business” is to darn socks and other clothes with holes in them (this reminds me, I have three socks with holes in them). Typically you use a thread comparable in type with whatever you’re darning the hole in e.g. for wool socks, use wool, otherwise the thread might cut the sock, say, and result in a bigger hole. Such repairs will significantly extend the lifetime of your clothing.

After this, you can move onto warped pots, hinges, drawers, backpacks … and advanced repairmen might want to tackle their own engine repair, etc.

(*) If you’re really really good, what you do is to build the things yourself rather than buy them, That way you know you can fix any problem that might occur. It is the ultimate insurance and one of the main reasons for doing it yourself.

Day 18: Join a challenge [19]

Some people like challenges and if so, adopting a challenge is a good way to stay motivated. Just think of the 100 push up challenge (I’m looking at you Syd :-D ), the buy nothing for a year challenge, the no-car challenge, the X dollar a month food challenge, the no impact challenge, and so on.

Finding a challenge is good, because it provides you with some rules and often there is much creativity and a greater sense of accomplishment involved with finding ways to solve problems under those restrictions rather than just using the traditional method of paying by credit card and arguing with a representative customer service until you get (or go) your way.

For instance, if you take a packaging challenge e.g. having to store all packaging in your house, not only will you gain a real understanding of all the superfluous wrapping(*) that consumer products ship with, but you will also find ways to avoid buying things that are excessively packaged. If you start weighing your outgoing garbage, maybe you will start composting to reduce that number.

(*) My packaging pet peeve is tea bags, where tea comes in a tea bag in a paper envelope in a box in a shrink wrapper. ARGH! Is all that really necessary? The most ironic example of this are organically grown teas; I suppose the shrink wrapper was organically grown too, eh?

Most of those challenges are finite in time, typically a year. I don’t know why that is? Possibly because it provides people with a way out? Or maybe it provides people with a goal or a finish line after which they can revert to their old habits. I think this completely defeats the purpose, unless you’re only looking for a book deal which seems to be a dime a dozen on those kind of projects. So just ignore the deadline and adopt it as a lifestyle. In the garbage example, I think you could just reset by cleaning out once a year, but I bet that won’t even be a problem. For instance, I reuse incoming envelopes and packaging material whenever I send a letter or a package and thus I never pay for envelopes or bubble mailers.

If you follow all the tenets of ERE, you will find that most of these challenges are fairly easy or you are already doing them. For instance, under our food budget, we are spending a little over $2/person/day, and so that could easily be turned into a challenge except it’s not challenging if you’re already doing it, naturally.

However, if you want to impress me, pick something like Riot 4 Austerity. If you follow their rules (and add housing which they leave out), you should by able to meet your early retirement goals quite easily.

For those with uncooperative spouses, it should not be too much of a problem to find a challenge you can do on your own, like cold showers :-D

Day 19: Getting rid of your TV (addiction) [20]

…and computer games.

While I can not prove this, I think not having a TV, or at least not watching it, is a big factor when it comes to choosing unconventional paths. Naturally, there’s this popular idea that TV feeds the masses with certain values, but I believe this is exaggerated. Most programming offers fairly reticent opinions and is quite free of content. The great beauty of TV is therefore not so much that it acts as a form of active propaganda steering people towards certain goals, but that it keeps people from having goals in the first place.

When TV was invented it was thought to be a great opportunity, a great teaching tool for quickly reaching the masses. However, ironically, it turned out that TV was much better employed to keep people from learning. This fits perfectly with the focus on specialization. During the day, professionals attend to their jobs. During the evenings, they vegetate in front of their TVs, thereby preventing them from learning anything, and this effectively keeps them in their jobs. Actually, the closer you get to middle class values and neighborhoods, the greater the preponderance of silent streets; all you see in the evening are empty streets with a faint blue hue emanating from behind the curtains of every house.

Retiring early is not just about saving enough money. It is also about learning things with the aim to save money as well as with the aim to find something with which to occupy yourself once you retire from employment.

Watching TV prevents this development, that is,

It prevents you from developing a dissatisfaction with your current life. It prevents you from developing new ideas. It prevents you from learning anything that can change your life. In other words, it promotes the status quo; your status quo. In other words, if you want to stay where you are. Keep your TV, but if you want to change, maybe the first thing to do is to get rid of your TV.

Day 20: Own classics [21]

When something stands the test of time, it becomes a classic. As far as I am concerned, everything else is “contemporary junk” items. I would strongly encourage anyone interested in living well on very little to “invest”, that is, buy and own classics rather than cheap—frugal is sometimes used as a euphemism—junk.

Now, it will very often be the case that classics retain or even increase in value. My Hanwag shoes (now more than a decade old) cost more today than what I paid for them back in mid 1990s. My Norroena backpack costs more today than what I paid for it around the same time. I note that my HiFi system costs substantially more for essentially the same components, only digital components are generally better today than they were ten years, but analogue components matured long ago.

Another way that classics are cheap to own is that you will be able to pay the lower used price, which admittedly is close to the new price if it’s still in production. However, should you decide to sell again a few years from now, you will be able to sell again at the same price or even perhaps slightly higher or at worst slightly lower. The difference can be thought of interest or rent depending on whether the return is positive or negative.

Accumulating classics require slightly more knowledge than driving over to the mall and swiping the credit card, but it is really not that hard. I have little interest in furniture, but a few weeks on internet research will certainly reveal what I should or should not buy. $1000 for a lamp, that’s crazy, you say?! Well, first, remember that you can probably sell it for the same price, so the cost is really much smaller than replacing it with the latest $100 atrocity every other year for the rest of your life. Second, you can consider this a kind of diversification, like investing in art, stamps, gold, or classic motorcycles. Third, I tell you the joy of using a superior product is quite superior to that of using an average product. Fourth, you do not need to accumulate everything at once. Get one when you can afford it keeping in mind that you are not going to replace it again for a long long time and after 10 years or so you will see that the pain of handing over the money will have gone while you still have the item (and the possibility of selling it again). Furthermore, fifth, rather than getting 10 lamps, when you’re only using one or two on a regular basis.

But what about opportunity costs you ask. Shouldn’t you put the money in an index fund and let the supposed magic work. Well, my question to you is, what are you going to spend the million dollars on fifty years from now? Contemporary junk? No, I’d say using at least part of your money and paying 3-5 times above the average or typical price for something is worth it if it has those “classical” qualities. There’s no point in hoarding money for the sake of just having large numbers in your bank account. Consider your savings and investments to be assets that pay for your food, rent, and other fixed costs, and then spend your “working-money” on really good things that last a lifetime.

Here’s a short list to get started: shoes, fishing reel, binoculars, pocket knife, wristwatch, music instruments (non-electronic), clothes (filson, barbour, burberry, etc.), pens, furniture, silverware.

Day 21: Investing for early retirment - Part 2 [22]

As mentioned in part 1, I am reluctant to give specific investment advice on this blog. The reason is that unlike frugality and personal finance, which anyone can learn in a couple of months (the difficult part is following through), investing properly takes at least a couple of years (here too, the difficult part is following through).

I saved money for 4 years before I even began investing. I’m throwing this out there, because an extreme early retirement strategy does not rely on compound returns simply because there are not very many years during which it can compound. If the market is with you, you may reach your goal in 4.5 years instead of 5.5.

That said, I realize that “being in the market” can be exciting. I also realize that many probably would not want to spend much time dealing with investments, so in part II, I’ll describe a method that is useful for cash flow and is simple to implement.

It is called Dogs of the Dow. It is a no-fee method. All you pay are trading commissions and you can easily find a broker that offers this. You will only need to make 10-20 trades a year. I use this method myself for my IRA money. (I have an IRA to reduce my taxable income.)

To implement Dogs of the Dow, all you need to do is to rebalance into equal amounts of the 10 highest yielding Dow stocks each year. That is essentially, the first ten on this list. This collection of stocks currently pay 4.4% and so it provides adequate cash flow for your recurring expenses without the need to liquidate stock (this is not the case for a broad index fund).

Each year, you check back. Sell any position that is no longer in the top ten. Buy any new position in the top ten. To minimize capital gains tax, hold gainers for slightly more than one year before you sell them and hold losers for slightly less than one year before you sell them. If you do not understand the tax rules for this, learn them—if you know how to fill out schedule D, you already understand this.

Obviously, you don’t want to sell off an entire position and then buy it again. This will trigger wash rules and other annoyances. Just sell or buy a little of each position that needs adjustment.

Only trade once a year. Add or withdraw cash the rest of the year. There are two ways of handling your cash position. The first one is dollar cost averaging. This makes you fully invested at all times and thus Wall Street likes this one and promotes it at every chance.

The other one is value averaging. With value averaging, assume, you have 100k in stocks and 20k in cash. Next year you decide you want 106k in stocks, setting a 6% growth rate. It is up to you to set the growth rate. I would set it at your withdrawal rate + inflation or around 6%. If you portfolio has dropped to 97k, you need to add 106-97=9k to it. If the portfolio has risen to 109k, you need to take 109-106=3k out of it and put it towards your cash position. Next year, the stock part should be at 106*1.06 = 112k. And so on. This method will automatically sell stocks in years where stock performance market is strong and buy stocks in years where stock market performance is weak.

I think index investing with a 3-5 year cash buffer is the simplest strategy you can get away with. The Dogs of the Dow portfolio, which is almost as simple, allows for less of a cash buffer and should therefore have higher return rates (not to mention its historically higher return rates, after all, you’re not buying overpriced stocks which you would when index investing). It should also fare better during a protracted market decline that lasts longer than your cash buffer.

Yet as I said, investing is very individual. Do whatever makes you sleep well at night.