Do you dread going into work in the mornings? Do you wish that you didn’t have to spend the best hours of your day in a cubicle, doing work that doesn’t interest you? I recently had the pleasure of reading “Early Retirement Extreme“, a philosophical and practical guide to financial independence written by Jacob Lund Fisker, who also writes at earlyretirementextreme.com. By following the practical advice in this book, you can restructure your life and get out of the rat race at an age you never would have thought possible.
The Rat Race
How do we get into the rat race in the first place? Well, there are a few causes: the first is education. Once upon a time, a high school diploma was more respectable than it is today. It was often sufficient for many different types of jobs, and college education was not simply a “marker” that was required to enter the workforce. Today, a bachelor’s degree fills the shoes of the high school degree of old, and it is seen as a general requirement to get almost any type of job except for certain trades and unskilled jobs. This has caused “degree inflation” — the more people that have a degree, the less it’s worth. Whereas a bachelor’s was sufficient in the past, one now often has to get a Master’s. This drive toward higher education eats up many years that could have been used generating wealth, and also leaves many students graduating with a heavy debt burden.
Is all of this education really necessary? Judging by the hordes of people who now loaf their way through a four year program, graduate, and, unable to find the job they expected, end up backpacking around Europe for a while before returning to do a Master’s… I’m not so sure. The price of education is increasing, whereas the quality is not necessarily following in step. I do believe that higher education can make sense if you can use it to your advantage, and while college was a mixed experience for me, I did enjoy university. Nonetheless, it may make more sense for many people to go into a trade school, instead, or to find another profession where they can make a decent living, but without having to spend many additional years in school, nor incur a mountain load of debt.
A mis-placed education is not the only way to shave years off your life and add up debt: the proliferation of low interest rates and easy credit (yes, even today) means that it’s very easy to pile onto that debt. Want a car? Go get a loan for it. Want a home? Go get a mortgage. Want to furnish the new home? Put it on the credit card. All of this consumption must come at the cost of future income, and the requirement to spend the best hours of the day working at an office in order to pay these obligations effectively turns a person into a wage slave; unless they want to go bankrupt and lose everything, they must continue to earn income. They have no financial freedom.
A side effect of this credit is that in our current monetary system, credit is not always backed by real savings. This leads to overheating which can drive up the prices of assets, such as homes. This price inflation punishes everyone except the first receivers of the new money who were able to buy in before prices were driven up. Everyone else must either borrow even more money, or go without a home for that much longer, until they can purchase in cash. Such inflation on the back of credit expansion can eventually lead to disastrous consequences, especially for those who end up in the most debt and are left holding the bag.
It’s usually not considered good investment advice to put all of your eggs in one basket, but that is precisely what many people do with their income. They don’t think like capitalists and try to accumulate assets which could generate income, nor do they look into diversifying their income into other activities. With all of the debt incurred to get an education, a home, transportation, etc… a person can become very dependent on their job and the income attached to that job. Without sufficient assets to cover the basics of life without having to work for it, this person is stuck in the rat race.
Getting out of the rat race
The picture looks dismal, but there is indeed another way of doing things that won’t leave you chained to your job until your 50s or 60s. Increasing income is always good, but Jacob makes the case that reducing expenses is even easier and due to so-called “progressive” taxation, a dollar saved can have more of an impact than a dollar earned.
What are the biggest expenses for most people? Taxes are probably the #1 expense, but since we can’t do much about them short of leaving the country (and if you’re well-off and from the USA, even that won’t help), let’s go with shelter, transportation, and food. These are thus the areas that will have the biggest impact on your success, or lack thereof, of getting out of the rat race.
I recently explored a newish exurban development that’s about 30 minutes out of downtown by car, when the traffic is good. The development itself is surrounded by forests and farms, and the only way in and out is via a high-speed divided highway. It doesn’t contain any stores, schools, nor anything aside from stand-alone suburban housing. There are no cul-de-sacs, but the streets are laid out in such a fashion that it would take 5 minutes to drive to a house directly behind the house facing the street that you’re on.
The houses actually looked fairly nice, and each one was distinct from the one next to it. I was surprised, since most of these sort of developments are usually very cookie-cutter. Each home was also fairly large, at about an estimated 2500 sq. ft. per home. Although the homes were large and looked nice, the cars were all standard recent-model econoboxes.
Nice houses or not, if you want to get out of the rat race someday, this is precisely the kind of development you do not want to live in. You’d have to get in the car and drive several miles for something as simple as a loaf of bread. Two cars would be required for a couple living out there. Forget about walking your kids to school, as it would take two hours each way, with some of it along the side of a divided highway with cars and trucks going 100km/h. Heating and maintaining that large home can be expected to consume a large portion of the budget as well, and let’s not forget about the large mortgage!
So, what is one to do? Is one relegated to living in a dump if they don’t want to be chained to their job? Not really. One does have to live within one’s means, though, and this not only means lowering consumption today so that one can consume more tomorrow, but it especially means lowering consumption today that must be financed through borrowing, and thus paid for in a greater sum, tomorrow.
Some of the topics that Jacob explores:
- Downsizing one’s home to what makes sense.
- Lowering the thermostat in the winter and raising it in the summer. Don’t worry, you’ll survive and your body will adapt!
- Living somewhere where a car is not required, so that a family can downscale to 1 car or even no car at all.
- Rediscovering the lost art of walking.
- Recovering minutes of your life that were used being stuck in traffic and used to earn money to pay for your car, and using them to build up your health and peace of mind instead.
To put it simply, save more, in fact, much more than the 10% that you’ve heard, though that is a good start, and stop living high off the hog by borrowing from your future!
Becoming a Renaissance man
What does becoming a Renaissance man mean? Think of a man like Leonardo da Vinci. Not only is the man famous for his inventions and scientific studies, but he is also one of the most famous painters of his time. His talents and interests were broad and deep, and there was no shortage of things to work on and explore.
Contrast that to the path that many people choose today. They become highly specialized in one particular area, but when it comes to the simplest house repair, an expensive contractor visit is required. Since this high degree of specialization is draining and can leave little time for other pursuits, the only alternative is to fill the void by spending money on entertainment, fashion, and rushed vacations to expensive resorts.
Jacob makes the case that while this high degree of specialization is beneficial in some ways (it can lead to a high income, for one), it leaves one highly dependent on their narrow set of skills, and leads to fulfillment in other areas being sought with dollars, rather than life experiences. A “Renaissance man” on the other hand, is a person with a broader set of skills and knowledge and who is specialized in many areas, rather than one. Such a person will be much more equipped to handle disruptive changes, and will also have many more outlets for creative expression and joy. Since there is only so much time in the day, a good strategy can be to lessen your dependence on the one thing you’re pretty good at, and start becoming decently good in a few other areas as well. It could also help you to find more joy in your own life.
Areas that might be a little too extreme
Although job outsourcing is a valid concern in the modern-day economy, I believe that Jacob may be overstating the degree to which people are specialized. I work as an R&D engineer in software development, and right now I do most of my work in Java, which is a currently popular programming language. It’s possible to become hyper-specialized in one particular aspect of Java, but if you know Java decently well, many doors are open for you.
Should Java fade away and be replaced by something else, it’s not likely that I’ll have to start over from scratch. Why? Because the methodologies remain similar; software development is about solving problems. If I need to instruct the computer to display a dialog to the user and then use that result to fetch something from a database, chances are I can figure out how to do it, if the language allows it. If I’ve already figured out how to solve this problem using one set of tools, it will be easier to learn how to do it using another set of tools. I believe the same is true of those who work in the finance and business professions. It may be that one day that AIs will be smart enough to obsolete all of us, but that is another problem.
When it comes to job outsourcing, my profession is at real risk, but the truth is that software quality from overseas can leave a lot to be desired, even if the team is being managed in-house. As Jacob alludes to in his book many times, quality is very important, and paying a bit more for quality can lead to spending less overall.
There is also a difference to me between being frugal and being too cheap. That line is crossed when the additional dollars saved do not compensate for the loss of well-being or enjoyment. I know I could save a few bucks by switching to fluorescent lighting, but the few dollars I would save would not make up for the negative health effects of fluorescent lighting nor the loss of enjoyment I get from a well-lit place. I have a friend that uses the overhead tubes everywhere and it’s horrible. I have another friend whose house is so cold that I need to wear my jacket indoors. I could save a few more bucks by setting the thermostat to 16 degrees, but it’s just not worth it to me to freeze my bones!
The path to early retirement
I personally enjoyed reading this book, and it opened my eyes to many changes I can make in my own life. Although we are taking a mortgage to purchase our new home, we are keeping our total home carrying costs to 33% of net income, and we have 20% down. We probably won’t be able to reach 75% of net income saved, but I think we could get to 50%. The new home is a small condo in a high rise, so we will save a lot on electricity and heating costs, and since it’s not far from downtown and there is a subway station nearby, we can also save on commute times and transportation fees.
I thought about it, and I also don’t think that we’ll be going carless. I did some calculations, and I believe we can bring the total carrying costs of the car down to $300 to $350 per month. I only drive on the weekends these days so I don’t spend too much on gas, but I visit my grandmother often and she lives a good distance away, and it’s not a fun trip to do by public transport. I also think it’s good to have easy access to on-demand personal transportation; I’d rather not be at the whim of car rental services or public transportation. $300 to $350 a month between two people is quite doable, I think.
Public transportation is another big expense, and one thing I might try in the nicer months of the year is to bike to work. It’s about 10 kilometers each way, and it usually takes me 25-30 minutes by subway. If I can get there in a similar time by bike, that could be a great way to get into shape and save money at the same time!
I also like the philosophy and theme of becoming a Renaissance man, and that’s something I’d like to work more into my own life as well.
The great thing about Jacob’s book is that it is not a recipe book; it is not simply a list of steps to follow, and then you’re out of the rat race. It is actually an entire philosophy that looks at taking a more hands-on approach to life, and finding satisfaction and joy through experiences, rather than material consumption. Jacob’s philosophy is designed to be robust, and he even tackles some of the great challenges of our century, such as peak oil, job outsourcing, and environmental degradation. By practicing Early Retirement Extreme, you won’t be immune, but you will be in a much better position to handle the challenges that lie ahead.
If you would like to read more, you can purchase the book from Amazon.com:
Jacob also writes at earlyretirementextreme.com, where you will find many interesting posts on early retirement extreme.
So, reader, what do you think about early retirement, extreme style? Giveaway: Would you be willing to save up to 75% of your net income and greatly reduce your consumption, but with the benefit of only having to work a few years and then being free for the rest of your life? Tell me about your dreams. I will be choosing a winner amongst the commentators by the end of next week, and the winner will receive a complementary copy of Early Retirement Extreme!*
*The contest is now closed; thanks for your participation!