Early Retirement Extreme - Jacob's Story

The personal finance blogoshere is filled with amazing writing talent, tremendously smart people that dedicate their time and energy to provide something of value to others. Of them all however, today’s guest post writer has challenged my thinking about efficiency, frugality and money management more than others. His extreme approach is not for everyone, but everyone can learn valuable lessons from Jacob; owner and writer of Early Retirement Extreme. It is an honor to share part I of Jacobs story.

My story began when I 24 years old and had just moved to Switzerland to begin graduate studies. I had just gotten my masters and received a bunch of papers about union representation, retirement plans, career negotition, etc. which I promptly ignored because I did not figure such thing concerned me. I knew very little about money. Money was essentially something I saved and after I had saved it, I spent it, typically on some electronic gadget. In fact I had a long history of gadgets that would entertain me for a few months afterwhich I would buy another one. I did realize that I was “growing up” but I really did not have any specific plans for the future other than getting a PhD. I heard something about the importance of starting a retirement account before I was 30, but that was about it.

I don’t know how, but at some point shortly after buying a new computer with a humongous screen for about $2500 (I’ll convert to USD to make things easy), I read an article about the credit based monetary system—at this time I had found a dorm room about 10 minutes by foot from my office because it was highly convenient and I did not want to be socially isolated in my own apartment in a new country—specifically I suspect it was an article from some subversive website which didn’t think too highly of the banking system.

Hence, right around my 25th birthday, I came to the understanding that mortgage debt was not a good debt. It was the worst possible debt I could imagine. Figure 6\% over 30 years and it meant paying for one’s home twice over, once for the actually house and once for the cumulative interest. Even worse, if one did not keeping working for the next 30 years, the home would be lost. And was it really fair that some banker could sit and collect money without working? Maybe so, but no banker was going to collect my money, so I decided to save enough money to buy my first home in cash.

From this point on I found another outlets for my money. Rather than trying to build the best gaming computer possible, I would be saving to buy a house in cash. Of course, when you’re on a grad student salary (about $19000 a year or so, so it is not exactly challenging to make more than that even with just a GED, hint, become a truck driver) and saving for a house, it can seem pretty far off. I think frugality is in my genes having always been fairly tight with my money when it came to things that did not mean anything to me—for instance, I spent half a year walking 10km roundtrip each day to school rather than paying $100/month for a bus pass. On the other hand I spent $150 for a pair of silver cables to connect my CD player to my preamp—but I started spending lots of time reading frugality websites. This was back in 2001 so there weren’t any blogs around. (I did not really learn of the existing of blogs until 2006/07.) At the same time I got interested in sustainability and resource use. I began to see that this idea of buying stuff merely to replace it with the latest model some time later was slightly insane, to put it mildly. In fact, I began to understand how the entire world, including myself, was addicted to consumption. I went cold turkey.

Initially, I was clueless. My meals were alright but kinda boring and now they became even more boring, but eventually I learned to cook them well and expand a bit on the selection. I stopped buying books. Since I loved reading, I went online and started reading news and forums instead. The modern equivalent is probably blogging. I stopped buying stuff. In the beginning my life became boring. However, after a few months of withdrawal, I watched my account grow. It was weird suddenly having $5000 in the account, the equivalent of two big gadgets. I had never had so much money before. I found that the potential ability to buy things gave the same pleasure as actually buying them. I remember walking past a car dealer on the way to the supermarket and noting to myself: “Hey, I could buy that car in cash.” (In Europe cars are a good deal more expensive than in the US.). Several months later, I noted that not only could I buy one car. I could buy two cars. I have found this to be a very strong motivator and a way to really put things in perspective. $20,000 may seem abstract, but walk past a car lot and note that “I could by this one, this one, and that one”, that “registers”. I also noted that my desire to buy stuff has severely decreased. It had become as uncomfortable to buy superfluous stuff as it had been not to buy it the year before. It became a game to see how long I could make things last. I darned my socks. Any seam that wasn’t visible and could be fixed was fixed. I wore out a bedsheet in the middle. I wore out the one towel I had in four years. My monthly expenses came to about $275 for rent, $85 for health insurance, $115 for food (food in Switzerland is very expensive!) and not much else. I was saving over 75% of my income.

Somewhat later I began to calculate how much money I had in terms of expenses. I noted to myself that I had enough money to survive for more than 8 years if I suddenly lost my job. That somehow made any issues about finding a job after graduation easier to deal with. Later I learned that this is called an emergency fund and that most people only hold 6 months of reserve. Today, my “emergency fund” (or invested equivalent) is close to 500 months (about 40 years)!

I do not know exactly when I realized that the possibility of having my money work for me rather than working for my money became an option. All along I had calculated the interest rate of my savings in the form of an hourly rate. I would take, say, $50,000 in savings and multiply it by 3% to get $1,500 per year and divide it by the 2000 annual hours of the standard work year to get $0.75 per hour. When I had $100,000 saved, I would do the same and get $1.50 per hour, and so on. I would start comparing this to actual salaries of say $12,000 a year, where $1.50 per hour corresponds to 3 months of full time work on minimum wage. I would explain that my money was the equivalent of having a sales assistant working for me full time part of the year. People who work for living never appreciate this example. It is harsh, but it is true and everybody gets the point.                  j

I began to see myself as a poor aristocrat or a rentier—more accurately, I had values more representative of those classes than the working class or the middle class. My clothes were either bought in thrift stores or several years old and mended. I had a certain eye for quality, specifically, I bought things either used or I bought the best of the best so I would never fall for the allure of “upgrading” and I spent most of my time engaged in theoretical research and not caring much for bling, so the idea of having a “refined” taste and using things with patina while having a low level of expenses and virtual people working for me somehow validated my choices. Maybe this was a coping strategy being surrounded by consumers, who were busy converting their hard work into stuff, I don’t really know. However, is it really illusion? Was I not becoming a capitalist in the true sense of the word? Could I not become the very banker I did not want to give my money to in the beginning of the story?

At this point I did not have any investments at all. All my money was residing in savings accounts. I did not have any retirement accounts either given the contractual and global orientation of academic research. It should probably be noted that many people of science have a snobby attitude towards business and investment as these fields are seen as somehow being baser and easier than the lofty science of the ivory towers. This was somewhat of a barrier to overcome.

However, I realized that increasing my rate of return from 3% to 5% would make a rather big difference in my asset income: Going from 3% to 5% is an increase of 66%. I started reading all I could about investing and slowly started transferring money from my savings to investments. I have tried various strategies but eventually ended up with a strategy based on mostly on large and midcap dividend stocks. To avoid too much hassle this is the strategy I recommend for anyone wanting to have their money work for them. The money stream is fairly predictable and I sleep better at night because the dividends keep coming even when the market is crashing, but I digress.

Whenever I was daydreaming, I was running mental calculations calculating passive income. At the same time I continued my way of life: Not falling into the housing trap. Living close enough to work to run over and check my calculations in less than 30 minutes, specifically not owning a car, and generally not spending money unless it concerned something I really needed and in that case buying the best I could find. I have a $50 lighter, $100 gloves, $200 day pack, and so on. However, in annual costs, having these is much cheaper than having to replace the “regular” stuff every year. My possessions were still limited to a couple of suitcases. Owning more makes it a real hassle to move. Moving every other year for the past several years I had learned my lesson. Too much stuff is a serious hassle. This also means that since I have only one lighter and not five, say, even paying that much turns out to be not that much at all. Also, after a while one ends up with a collection of pretty good stuff. Another thing I liked to do was instead of buying souvenirs, I would buy things I would actually use instead. I bought my Swiss Army Knife in Switzerland and my pocket flashlight in Hamburg. Also, if there was a question of buying something where I was not certain I was not going to use it at least once a month, I simply would not buy it but try to improvise a solution instead.

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