Recently, my news stream has been full of anti-FIRE articles. I’m not sure why. It’s like Google just found out I’m an early retirement blogger or something. Maybe my site redesign has something to do with this recent development. These anti-FIRE articles are pretty annoying. It seems those authors just make some assumptions without getting to know someone in the FIRE movement. Anyway, there are still a lot of misconceptions about FIRE. This is an opportunity for me to dispute some of these misconceptions. Today, we’ll talk about extreme frugality.
*FIRE is short for financial independence, retire early
One recurring misbelief is that you need to live extremely frugally to achieve FIRE. Nobody wants to live frugally forever. There is a shade of truth there because many of us went through the extremely frugal phase when we first learn about FIRE. This is because we want to achieve financial independence as quickly as possible.
The key FIRE concept is to accumulate 25x your annual expense. Generally, this is enough to sustain a retirement for 30+ years. For early retirement, you can work a bit to generate income and reduce withdrawal in the early years. In any case, you need to save much more than the usual 10% that most financial advisors recommend.
There are 2 ways to save more money every month – increase your income or reduce your expense. The hard way is to increase your income. It’s a better long-term solution, but it takes time and a lot of effort. The easier way is to spend less. If you are a normal person, you have plenty of room to reduce spending. You can save more right away by cutting back and live frugally.
New FIRE initiates often learn they can achieve financial independence in less than 20 years if they save 50% of their income. Who wants to work longer than necessary? Twenty years is already really long. The FIRE initiates would review their monthly cash flow and then figure out that the easiest way to quickly boost their savings is to live extremely frugally. They jump in with both feet and cut all extraneous spending to reach 50% saving rate. However, this is an abrupt transition. It’s hard to adapt to the frugal lifestyle if you aren’t used to it.
There are 2 possible outcomes.
- They get tired of living extremely frugally, give up FIRE, and tell people they don’t want to live frugally forever.
- They get tired of living extremely frugally and then spend a bit more to live a modest, yet comfortable lifestyle.
For me, #2 is the correct way. You find a comfortable spot and do your best to minimize lifestyle inflation after that. The rest will work itself out.
Extreme frugality is a great way to raise your saving rate, but not many people can stick with it. When I first learned about early retirement, I cut way back, too. We stopped eating out, stopped buying new clothes, minimized travel, and cut way back on entertainment. Others take it even further by moving into a tiny house, eating a lot of rice & beans, and/or getting rid of their vehicles. However, it’s difficult to live like that in the longterm. Eventually, we loosen up a bit and figured out how to raise our saving rate to 50% without extreme frugality.
It took us a while, but we consistently save over 50% of our income almost every month. Here are some of the ways we did it.
- Housing expense – We own a duplex. We live in one unit and rent the other one out. This keeps our housing expenses low.
- Vehicle expense – We share one car.
- Food expense – Mrs. RB40 and I share cooking responsibilities. I cook on the weekdays and she cooks on the weekend. Once in a while, we’d go out or order takeout.
- Increase income – We raised our income with promotions, side hustling, and passive income.
Extreme frugality is okay for a little while because it can teach you what’s important to you and what isn’t. For us, travel is very important. We enjoy visiting new places and travel is one of our highest spending categories. On the other hand, our car doesn’t matter that much to us. It’s just transportation. Once you figure out what’s important, you can adjust your spending accordingly. Meanwhile, minimize lifestyle inflation and your saving rate will increase naturally every year.
FIRE isn’t extreme frugality
In conclusion, FIRE isn’t about extreme frugality. It’s more about prioritization. You figure out what’s important to you and spend on that. Unimportant things can be minimized and they won’t impact your happiness much, if at all. Everybody I know in the FIRE movement lives comfortably and rarely hesitates to spend on what they really want. That isn’t extreme frugality. It’s knowing what you want.
Did you go through the extreme frugality phase like I did? Did it teach you anything?
Image credit: Clay Banks
Source: Retire By 40