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Monday, January 24, 2011

Early Retirement Extreme: The Review

(Library Copy)
Back in 1998 when I purchased my first home, I bought a fixer-upper, as a lot of people do.  The loan for the house was a 203(k) loan, which lends money for the house and for the renovation.  You have to draw up a plan for the renovation and have it approved, and then as things get done (with your own initial outlay) you can draw the money owed you from the loan.  So my house was seventy thousand, but the loan was for eighty-five. I put more than fifteen thousand dollars into my house though, because I wanted it a certain way, and because I knew I'd get my money back, eventually.  I nearly bankrupted myself in the meantime, but once we sold the house, I did get my money back, and then some.  Nowadays, I'm not so sure that I'd be that lucky again.

These days, I'm making investments of a different sort, and all have the same goal in mind: I'm trying to set things up now, so that our cost of living is reduced in the future, or at the very least, so that we don't starve or have to choose between medication and food as old folks.  It's kind of a different approach to retirement, I realize, but part of the equation I'm using is the fact that this world is changing very rapidly and by all accounts, for the worse, so I want to be ready for that as well, as much as possible.  In a sense, I'm planning for living my life in the future the way that Jacob Lund Fisker is living his life now; rather on the lean side.  Very simply put, Mr. Fisker has been able to retire in his early thirties by living on one quarter of his income, saving and investing the other three quarters, and then living on the income generated from those assets.   And we're talking about saving net income here: your entire pay, less any taxes you have to pay.  He does not advocate putting money into a 401(k) plan because it rather defeats the purpose, which is to have enough money to retire now, not later, which is what conventional retirement plans are for.   I kind of wish that he'd written Early Retirement Extreme thirty years ago, but that would have been a hell of a feat for him, considering that he would have been five or six at the time.  It's just that it would have made such a huge difference to me.  So much so, that I'm considering a copy as a gift to my eighteen-year old nephew.

One thing this book is not is an investment how-to.  It's more or less a strategy for financial independence how-to.   I really liked this book, and hope to try to put his theories into practice.  But because his methods are pretty extreme, it would be a very hard thing for me to do at fifty-one years of age because I'm so ingrained in my ways. That doesn't mean I can't change; it just means that it's going to be much, much harder.  Plus, it's a little late for me to retire early.  I'll be lucky if I get to retire, period.   Still, I think this book has a lot of value, and it will be of more service to a reader the younger that reader is.  At this late stage of my life, the most that I'll probably be able to gain from it is a very good road map for simplifying my life, and maybe reducing some expenses.  And in all honesty, some of the things he recommends I've been doing for awhile now anyway.

However, for younger people, it should be required reading. It would be impossible for me to try to encapsulate his ideas here; after all, it took him an entire book (albeit a small one) to present them.   And at one point in the book he wades into higher math and presents formulas that quite frankly, left me in the weeds, which is part of the reason I want Steve to read this book as well.  But Fisker also presents some tenets that even a knucklehead like me can understand: freedom is achieved by creating a large gap between  production (or revenue) and consumption (expenses) and this can be done by one of two ways: earning more or spending less; it is far easier to reduce your expenses by three quarters than to increase your income by a factor of four.  I also like the idea of including the cost of storage in the equation for deriving a total cost for your stuff, i.e., the extra cost of a second bedroom to your mortgage for a guest room that hardly ever sees guests.  In this regard, it reminds me of my husband's uncle whose apartment doesn't have a second bedroom; if he has guests, he puts them up in a hotel for a night or so, which, when you consider it, is a LOT less money expended than the percentage of mortgage payment that a guest room represents. Something I never considered before. I should probably mention that his uncle is a millionaire, so perhaps this idea has more merit in practice than it does in theory, which is something else to consider.

His methods are extreme, however, and that's why I think that they are best learned at a young age; it's far easier then to adopt a non-consumerist lifestyle, and you have much more time to accumulate savings that will eventually be turned into assets that generate income on which you can live, easily, because you have a non-consumerist lifestyle.  And by extreme, I mean extreme.  His non-consumerist philosophies would have one be able to fit their entire possessions into a suitcase, or two, at the most.  He doesn't just tell you to do that, though.  He presents a strategy for thinking about it and achieving it, which is why this book would useful for anyone who really, truly wants to simplify their lives.  I'm not saying that this book wouldn't be useful for just young people, because there is probably something here for everyone.  I just think that it would be much easier for young people to adopt the ideas presented, and they would reap greater benefit by doing this early in life.  I'm a middle-aged woman attached to her stuff.  Still, I could sure make do with getting rid of a lot of that stuff.  It occurs to me that when Steve and I first started dating, he was living that way. He had next to nothing in his house, save the minimum that he needed, and he was socking a lot of money away.  Then he met me and we married, and I undid all that.  He still doesn't have much stuff in this house; most of what's in it is there because I put it there.  I did this.

The entire name of the book is Early Retirement Extreme: A philosophical and practical guide to financial independence.  I think it is just that; a guide, and a good one.  I wish I'd had it, and the presence of mind to pay attention to it, years ago.  Buying my own home had always been my goal as a young adult; now I see that it should have been buying my own freedom from having to work for a living.

But do yourself a favor: borrow it from the library first.

10 comments:

Paula said...

It dawned on me that some folks might wonder what retirement has to do with homesteading. It all has to do with self-sufficiency....

Marianne said...

Hi Paula
I've been reading your posts about this and one thing that unsettles me is the idea of living in a tiny space. Because I do. I retired at 60 (normal for women here at that time) having moved a year earlier into what we call an old people's bungalow. 2 rooms each 10 foot by 14 plus a galley kitchen and shower room. I downsized easily and didn't have a problem giving away a load of furniture and all the books I hadn't opened for 20 years.
A house like this is fine for my elderly neighbours whose only activity is watching television. But I do *a lot* of gardening (my veg plot is on a friend's land), I walk the hills and work in the woods and make things from wood and I spin and knit and crochet and sew..... I'm the only person I know who keeps the workmate in the wardrobe, fleeces under the bed and the gardening tools in the car. I'm forever falling over things and I'm a tidy person. I discourage more than 2 visitors because we can't sit down. Ever had a dinner party on the bed?
So, wonderful to downsize and get rid of the stuff you don't need; wonderful to reduce all your housing and related costs but think long and hard about what you do when not working and how much space that takes up. cooking from scratch like I do takes more space than opening a packet. where do you store all the food you've harvested? Have you got space for a freezer? how about all the fruit and veg you've bottled? the strings of onions and sacks of potatoes?
Hmmm.

Paula said...

Hi Marianne- I've considered all you talk about, actually. In all likelihood, we will not leave this house, much as I would like to move to the country. So the downsizing here is to just get rid of stuff that is gathering dust and filling corners. I have a huge kitchen, and like it that way; if we ever did move, I'd have to make the kitchen in the new house proportional to the new space as this kitchen is to this house. I've considered the kitchen storage issue, as well, and can only see a separate building for things like my canner and Steve's brew pot. Onions and potatoes would go into a root cellar- one of the things I would look for in a property is a good-sized hill, because water can usually be drawn off it, and the easiest root cellar to build is one into the side of a hill. There's always the idea of storing roots in the field as well. I currently have a day bed in this house that has storage underneath it- that's where the extra packages of toilet paper go (they come thirty-six to a package) and my extra pickles and jams and all that go there as well. I think it can be done- it just has to be planned well. I'm not sure that I could make do with a 'tiny' place, but I think I could fit our life into less than 1400 square feet, which is what we have now. But, like I said, it's very unlikely that we'll change homes, which is probably a god thing. I have to remember to consider my gifts for what they are.

Paula said...

...I mean 'good thing', although maybe it is a God thing....

Marianne said...

You sound very sussed. I was just concerned that excerpts I've seen from the book seemed to be holding up the idea of a very small living space as a major way to save money - as indeed it is, with reservations!

Paula said...

I don't know what 'sussed' means....actually, the impression that I got from the book is that Fisker rents a place, which doesn't make sense to me. I think he does advocate a small space, but that's because he advocates not filling your life up with stuff (stuff is the enemy). One of the things he discusses is having hobbies but to make sure that those hobbies lead to things that will make you money, and not just having to buy more stuff. I'm guilty of that one, unfortunately. His hobbies seem to be ones that take no more space than a computer (blogging) or are conducted outside (gardening and sailing). Which has me wondering about the sailing that he likes to do: I once heard the description of a boat as being a hole in the water into which you throw money. He must have a friend with a boat, I guess. (I've also heard that's the best kind of boat to have: a friend with one.)

I can see where having a tiny place to live would make life more difficult, especially for someone with a lot of varied interests, but I also like the idea of designing a place where everything has its place and no space is wasted. That could be conditioning from my mother, who once was a student of architecture; I remember looking at model houses in a new development and her complaining about all the 'wasted space!' or maybe I was just a sailor in an earlier life and I'm just drawn to things that are ship shape...

Lauren said...

I have requested this book from the library. Since I am sharing this life with another person it is a bit harder to make choices like I am sure the book suggests but we are already doing what we can (doesn't mean we can't do better). I wouldn't say I am "old" but I wish in high school a different life style had been presented. I had to learn the hard way after accumulating a ton of debt (to "pursue" the American Dream). I now know of a new dream but I had no idea about the things I know now when it would have mattered (more).

Paula said...

Lauren- When two folks live together, they have to face the race as a team. Teams communicate. Together you guys should decide what you want to do, what you can't live without and what you can, and how you're gonna deal. When you're done with the book, have your partner read it too, and then you guys talk about it. What makes sense? What's a realistic goal you guys can hit this year?

Wait until you read what Fisker has to say. I'd be curious to know what you think when you're done. By the way, you look a lot younger than me from your picture; I think you have time to catch up!

Joris said...

Fisker lives in an RV.
He doesn't own a boat, nor has a friend who does. He sails as crew.
You can read his blog: www.earlyretirementextreme.com.

Paula said...

Ah! thank you Joris. I've been following his blog, but didn't discern the details. Thanks for straightening me out.