Tag: frugality

The Basics of FIRE

March 10, 2023

After seven years of blogging in the personal finance and FIRE community, I realize that there’s one type of post I’ve always avoided: How to explain FIRE to a complete newbie. Until now, I’ve outsourced that task and simply referred to the Links Page. But where’s a good overview, all in a simple and comprehensive post to give a one-stop overview of what FIRE is and how one can pull it off? I’ve come across a lot of good information, but it’s all in bits and pieces and here and there. I’m not going to dump a reading/listening list of 20 different posts/shows on 18 different blogs/podcasts on someone new to the community. And my Safe Withdrawal Rate Series? Great stuff. But it’s also the deep end of the pool, and I would likely scare away any new recruits. That series is targeted at folks already retired or nearing early retirement.

So how would I explain or even pitch FIRE to someone new to the community? Let’s take a look…

Continue reading “The Basics of FIRE” →

Stealth Frugality

June 16, 2021

We all heard about stealth wealth, i.e., being wealthy without being flashy! Live below your means! There are blog posts about it (Physician on FIRE, Retirement Manifesto, and many more). A large part of The Millionaire Next Door book is about Stealth Wealth. We certainly have been practicing that principle while accumulating wealth, and especially now that we live our comfortable life in early retirement.

But we never overdid the stealth wealth either. In other words, when I announced my retirement in 2018, not a single relative, friend, or colleague blurted out “Yeah, you’re such a cheapskate, no wonder you accumulated seven figures!” Quite the opposite, people wondered how we were able to save and accumulate so much without looking cheap to the outside world. Very simple, we were frugal, but we were able to hide that frugality very well. In other words, we were practicing…

Stealth Frugality = frugality without looking and acting like a miser!

And Stealth Frugality doesn’t rule out Stealth Wealth. It’s more of an extension, a less extreme form of stealth wealth. Being a math wonk, let me make the point with the diagram below. If we plot on the x-axis the perception of wealth and on the y-axis the reality, then really everything above the 45-degree line, i.e., reality > perception, is stealth wealth of sorts. But the trick is to move out of that top-left corner (act poor, big bank account) and a little bit more to the right. Without dropping too close to the x-axis and certainly not all the way to the lower right corner (=Keeping-up-with-the-Joneses, drowning in debt). In other words, Stealth Frugality involves spending wisely without breaking the bank, i.e., try to find some spending categories to splurge on that follow a flatter path than the Minus-45-degree line!

So, why and how did we practice Stealth Frugality? Let’s take a look…

Continue reading “Stealth Frugality” →

The Shockingly Simple/Complicated/Random Math Behind Saving For Early Retirement

One of my favorite Mr. Money Mustache articles is the “Shockingly Simple Math” post. It details how frugality is able to slash the time it takes to reach Financial Independence (FI). That’s because for every additional dollar we save we reduce the time to FI in two ways: 1) we grow the portfolio faster when we save more and 2) we reduce the savings target in retirement by consuming less.

That got me thinking: Is the math really that simple? How sensitive is the savings horizon to different rates of returns? What happens if we use historical returns instead of one specific expected return assumption? How important is the asset allocation (stock vs. bond weights) on the path to early retirement? How much does the equity valuation regime (e.g. the initial CAPE ratio when starting to save) matter?

So, in typical Big ERN fashion, I take an ostensibly simple problem and make it more complicated!

Let’s get the computer warmed up and start calculating…

Continue reading “The Shockingly Simple/Complicated/Random Math Behind Saving For Early Retirement” →

You want to know our savings rate? Which one?

Last week, I read a nice post on Chief Mom Officer on the challenges of calculating savings rates. Right around that time I was also revisiting our 2017 budget and the projections of how much we are going to save this year. This is the last full calendar year before our planned retirement in early 2018 and it’s imperative that we stay on track and keep a high savings rate on the home stretch. But how high is our savings rate? Is there even a generally accepted way of calculating a savings rate? What are some of the pitfalls? We were surprised about how easy it is to mess up a calculation as seemingly trivial as the savings rate.

Continue reading “You want to know our savings rate? Which one?” →

The dangers of getting close to retirement: “Yeah, I’ll do that when I’m retired!”

The other day, my wife asked me to take out the trash. My response: “Yeah, I’ll do that when I’m retired!” We both got a pretty good laugh out of that one. After I took out the trash (pre-retirement, obviously), we realized that our planned retirement date, hopefully in early 2018, creates all sorts of inefficiencies; I catch us procrastinating already! YIDTWIR=”Yeah, I’ll do that when I’m retired!” Are they the seven most dangerous words for the approaching-FIRE crowd?

Procrastination is as old as humanity and if there weren’t enough temptations to postpone stuff already, a retirement date in the near future is the mother of all reasons: Procrastination-palooza! Think about how much procrastination an absolutely arbitrary date like January 1 creates: “I’ll quit smoking/go to the gym/work less/work more/etc. in the New Year!” The main reason for New Year’s resolutions is that they give you cover – a guilt-free, chain-smoking, TV-binge-watching couch potato existence between late October and December 31. There is absolutely nothing magical about January 1 but it still creates New Year’s resolutions. And, of course, resolutions are never broken but just postponed to January 1 of the next-next year.

But an upcoming retirement date is different in that you will actually have more time on your hands. Continue reading “The dangers of getting close to retirement: “Yeah, I’ll do that when I’m retired!”” →

Top 10 reasons for having an emergency fund – debunked (Part 1)

In a past blog post, we pointed out that a $0.00 emergency fund is most useful for us. Lots of visitor traffic came from both Physician of FIRE and Rockstar Finance (thanks for featuring us!!!) and most comments were very supportive. Good to know that others follow a similar approach. To make the case more complete we should also look at some of the standard arguments people normally use in favor of keeping a large stash of cash for emergencies.

That’s because in addition to some of the complaints we got in the comments section, someone we quoted in our post, Scott Alan Turner, is a blogger and podcaster and he dedicated almost an entire 28 minute podcast (transcript included if you don’t want to spend 28 minutes) to our theory and why he thinks we’re wrong. We respectfully disagree!

For full disclosure: I really like Scott’s blog and podcasts in general. I mean no disrespect and like to invite everybody to check out his material. I agree with most of what he has to say, just not the advice on emergency funds! Enjoy!

So, let’s look at some of the arguments in favor of an emergency fund and debunk them. It took us a while to put this together, but better late than never! Continue reading “Top 10 reasons for having an emergency fund – debunked (Part 1)” →

Early Retirement Math 101

Here are some simple calculations to show the benefit of compounding and the power of turbo-charging your savings. If you don’t believe you too can get rich in 10-15 years keep reading!

The power of compounding

For the average retirement saver this effect is huge. Compounding your investments over 40 or so years works wonders with your savings. If we assume a real index return of 5% (net of inflation, dividends reinvested), the first dollar invested grows to $7.04 in real terms. Investing one dollar every month, adjusted by inflation and compounded with 5% annual return gives you almost $1,500 after 40 years.

For the turbo retiree who wants to retire after, say, 150 months (12.5 years), compounding has a lot less opportunity to unfold. That first dollar grows to only $1.84 in real, inflation-adjusted terms. Investing one dollar monthly (inflation adjusted) and getting 5% real return yields only around $206 after 150 months.

What we lose due to less compounding we have to make up with frugality!

The power of frugality

During the accumulation phase, every dollar we don’t spend every month accelerates the retirement date in two ways: Continue reading “Early Retirement Math 101” →