If you read my last post a few months ago, you know that [and why] I decided to put a moratorium on blogging and instead decided to take up an interesting offer to go and do ‘rocket science’ as a quant in Chicago.

Let me tell you: Having access to all these trading tools, data, and computer infrastructure and spending the day developing financial models sure-as-hell beats discussing the exact meaning of the word “retirement” with some semantics-yahoo or having to see the “living in a van down by the river”-joke for the Nth time posted on some popular internet forum. Forsooth(<- I haven't used that word for a while), having a quad-monitor setup beats sitting with a calculator at home reading 10Qs and writing an occasional comment/post about it and potentially switching position to a new stock every 2-3 years. There's "reading and writing about airplanes and then there's getting a chance to fly them for real". I think I'm experiencing what extroverts refer to as fun-fun-fun. Here I hurry to say that my version of introvert fun-fun-fun involves something like the above; not lying face down in a pool in a Thai beach resort half-passed out from drinking too much beer after a particular masterful karaoke(*) impression. I'm more the type to lie face down on a keyboard after a particularly productive coding session.

(*) Karaoke --- a Japanese word that I think means something like "shamefully embarrassing".

Overall, changing track was a good decision.

Occasionally (maybe once a month or so) I get an email out of the blue (i.e. "Hi, I just discovered your blog ...") from someone who made some ERE- or YMOYL-like choices twenty or thirty years ago and who are still going strong. That is, they learned to live well without spending much money and then saved the rest to render them financially independent. Often these emails come with interesting stories about what said person has done. Anything from being a ski-guide to pictures of their home in the tropics, to living in a tent on Hawaii for a year, winning chess championships, going back to college, learning a new language, moving to other countries, studying the combined works of some philosopher, running a monthly marathon, to living on a boat.

We gotta keep in mind that 1) ERE is not rocket-science---any critically thinking person should be able to come up with the not-so-complicated concept that saving a much higher fraction of one's paycheck will allow one to retire (become financially independent of earned-income) much earlier than the default 10%; 2) For every writer telling his or her story there are 500-1500 non-writers out there independently doing what the author is writing about.

This should help some folks separate the message from the messenger. The idea that I should somehow be representative of living frugally and being financially independent and that everything about saving and investing money stands and falls with my personal decisions is therefore ridiculous. I'm a sample size of 1 out of 1500. (As any statistician will tell you, you can't conclude anything about the distribution from N=1.) Add to that the other dozen books that have been written over the past two decades and it suggests that there are 10000 people out there doing this or one in 30000 (I'm only counting Americans). This also explains why odds are low that you personally know someone who is FI/RE. However, much like the temperature in your backyard doesn't prove or disprove global warming, whether you personally know anyone who FI/RE'd doesn't prove or disprove the possibility of it. Math does that. Ask your CFP how the numbers work out.

The thing I've learned about writing/blogging is that some popularity is good [because you get to see some interesting people you otherwise wouldn't have met], but too much popularity is bad [because a lot of people you'd rather avoid get to see you]. For example, if you're living in the 16th century, discussing your round earth theory with fellow scientists is good. However, being publicly known as the round-earth guy will get you burned at the stake. In general, I don't think humanity has changed much since then. The life-lesson I've learned from this is to avoid politics or challenging the average person's assumptions. This is also why I don't really feel compelled---let's say, I’m rapidly giving up on the idea—to “save” [insert cause] anymore. Most if not all problems in the world today have economic or technological solutions which could be adopted if everybody just agreed to get it done. It’s just that those problems (e.g. starvation, war, species extinction, …) are not considered worthwhile by enough people.

However, with this experience I now know I’m not the one to get people to agree on what’s important. I’ll leave that to someone else who’s more skilled in salesmanship and politics. My sphere of competence is providing technical solutions, not psychological solutions, so I should stick to that.

Hopefully this lesson will stick.

So I guess I’ll just do what most people do: outsource the job to charity rather than personally suffer the abuse that comes with doing politics.

Some of you might be interested in how our budget has changed moving to Chicago.

Three words: Reverse sticker shock.

Health insurance dropped from $99/month to $85/month. I’m still using an HDHP/HSA for now. As has been discussed here many times before (yet a woefully large number of people still seem ignorant of this kind of insurance), the HDHP/HSA solution is ideal for a healthy person with massive (six figure) financial means. The deductible on those plans is typically $5000/year. This means that should you get cancer or something equally serious which will max out your entire deductible year after year (that is, you’re REALLY REALLY sick and likely to die), even a mere $100k will still last two decades.

Note: That we’ll switch to corporate (tax-subsidized) health insurance once I qualify. Unlike the last one, this company actually provides spousal coverage which is cheaper than two HDHP/HSAs.

RV insurance obviously fell away. The car insurance dropped in price as well—drivers in Chicago might be crazy but they’re apparently not as bad as the Californians. Gas is slightly cheaper, but the car is rarely driven anymore. We’ll probably sell it in a couple of months.

Food is cheaper.

The cheapest rent in Chicago starts at $600/month w/o utilities. It’s practically impossible to find anything under this(*). We’re at $875 in a 1BD apartment with heat and water included. With more time we could probably have scored one of the cheaper units—that is the cost of ignorance/not living in the area/having to find something quick (weighed against the higher cost of temporary living); we might move into something better (less expensive!) next year. Gas and electricity barely comes out at just a little bit over the connection fee. So housing costs have increased by roughly $300 total or $150/month per person.

(*) However, housing is cheap compared to the other places we’ve been looking (Oregon and New Hampshire, FYI). Non-fixer-uppers in Chicago proper seem to start at $125 with fixer uppers around $75k. Reduce by $25k if you’re in the burbs. This is certainly worth considering. We’d just pay cash.

Sports have been reduced to $0 whereas subway (my ticket to daily entertainment) has increased from $0 to $90 so that’s a wash. I should start biking soon.

So to be very conservative, my budget has increased by about $100/month standing at about $650-700/month.

Seeing as the market recently went up [to a point I now consider overvalued or bubbleishly bullish with analysts calling for low forward P/Es despite profit margins at a historical highs---shouldn't they know better?!], my withdrawal rate is still under 2.5%.

This means I can easily eat whatever increases in health insurance that may come along as I get older.

Actually, if we combined the household savings (as many more traditionally inclined (read: older than 50) folks seem to insist on), both DW and I would be FI now. DW is thus spending some time figuring out what she wants to do in terms of career, making the right choice, etc.

I’ll write a new update if/when something interesting happens …

(Keep your eyes on the forum for possible meet-ups around the country in the future. There’s one in LA tomorrow.)

The quintessence of saving is to spend the money while not working. Thus if you work for a month and save half your income, you can take the next month off. That should be obvious. So …

If you save 5% if your income, you can take 1 year off every time you work 19 years.

If you save 10% of your income, you can take 1 year off every time you work 9 years.

If you save 20% of your income, you can take 1 year off every time you work 4 years.

If you save 30% of your income, you can take 1 year off every time you work 2 years and 4 months.

If you save 40% of your income, you can take 1 year off every time you work 1 years and 6 months.

If you save 50% of your income, you can take 1 year off every time you work 1 year.

If you save 60% of your income, you can take 1 year and 6 months off every time you work 1 year.

If you save 70% of your income, you can take 2 years and 4 months off every time you work 1 year.

If you save 80% of your income, you can take 4 years off every time you work 1 year.

If you save 90% of your income, you can take 9 years off every time you work 1 year.

Interesting, indeed! Of course normal retirement plans use savings rates less than 20% and depend on something called the “magic of compound interest”. Now there is nothing magic about compound interest, which is simply exponential growth, but there certainly is a great deal of magic associated with determining the input parameters of investment returns and inflation. These input parameters, particularly when extrapolated over large time intervals (anything more than 10 years), crucially determine the end results.

Now this kind of magic is good in theory, but sometimes it is difficult to implement in practice. Capital assets (aka tools, incidentally, you should really click on that link and read that post if you have not done so already) will give superior returns if but only if the assets are purchased at a good price and only if the assets actually improve efficiency. It is easy to find examples of investments that were purchased for much more than their worth (are you paying too much for the in my opinion totally overhyped index funds? You probably are. How do you know? If the P/E of the index is higher than 18, 1.5 times the generational average, you definitely are! Currently, the value is around 17 which corresponds to an earnings yield of 5.8%. This means that future returns are not going to be as impressive as historical returns. Another problem is the reigning economical philosophy. What is the purpose of a company? Is it only to maximize shareholder value? The shareholders certainly think so. But what about the company’s effect on the workers, the consumers and the nation as a whole. If those values change, returns will change.

Therefore you gotta ask yourself a question: How much of your retirement strategy is based on things, like your savings rate, which you can control, and how much of your strategy is based on things, like the future return and inflation rates, which nobody know and which are out of your control?

Originally posted 2008-09-11 06:53:16.

To illustrate, let me use an example. If you knew of a company that was for sale for $25 million, but had inventory and accounts receivable worth over $80 million, and total liabilities of just $40 million, would you be interested? You would be buying $40 million of liquid assets for $25 million…but who has $25 million lying around? Fortunately, the stock market sells you much smaller chunks of these types of companies, but the ratio of what you’re going to own to what you have to pay is just the same!

In fact, the stock market contains a plethora of small cap companies that no analysts follow and that no institutions hold…these small stocks are just too tiny for paid analysts and large funds to pay attention to. As a result, for the prudent investor who is willing to look for the handful of gems among these issues (and finding these do take effort, for such blatant mispricings are few and far between), the promise of better investment returns along with downside risk protection holds true.

At Barel Karsan, we try to find companies worth $1 that sell for 50 cents (see here for one such example). We identify such companies, we discuss them, and we hold onto them until the market recognizes their true value. This investment strategy has been practiced by Warren Buffett, Ben Graham, and countless other value investors and has served them all well. It can do the same for you.

(*) A 1 percentage point move in your rate of return can have a monumental effect on your savings over a period of several years. For example, $100,000 becomes $760,000 after 30 years at 7%, but runs over $1 million at 8%.

Much thanks to JH for the donation.

Originally posted 2008-09-15 00:54:48.

Of course this provides a steady source of income for the company and a steady sink of expenses for everybody who haven’t learned the art of the snot rocket or consider snot rockets a breach of etiquette in a corporate environment, well, I guess that goes for all of us. Therefore I use a handkerchief. A handkerchief is, in case you don’t know it, a piece of cloth that is approximately 10 by 10 inches. For further details ask any old person over the age of 60.

Handkerchiefs are convenient and fit nicely in a pocket unlike boxes of kleenex which are somewhat uncomfortable and unsightly when stuffed into a front pocket. In addition I can easily blow through a kleenex whereas I have yet to perform the same demonstration of nostril directed lung power on a handkerchief. Another consideration is that the use of kleenex necessitates access to a trash can. Otherwise the snot soaked kleenex has to go into the pocket and fishing them out again in their semi soaked state is not nearly as pleasant as fishing out a used but dry handkerchief.

Getting around to costs. Handkerchiefs lasts a long time. The reason is that they can be reused – what a concept – and washed whereas the same is not the case for kleenex. This fact apparently escapes DW as she still leaves kleenex in her jeans pockets presumably for me to wash from time to time, hmm

The goods news is that unlike cleats, which make your shoe soles last longer, it is still possible to buy handkerchiefs in stores. I prefer my handkerchiefs to be white/light, solid and non-embroidered. Embroidery irritates the nose and does not absorb well and colors don’t do well when washed on warm or hot.

Apparently I am not the only one who has been blogging about Kleenex lately. Check out AllFinancialMatters. I think there’s a Kleenex meme going around.

Originally posted 2007-12-19 02:22:00.

For instance, it very common to decide to get in shape and then order/buy some (cheap) exercise gadget. However, poor equipment rarely brings satisfaction. Instead what I do is to set a trigger in the form of commitment. For exercise, I would say, do not buy anything until you can run 5k straight, do 10 pull ups or 20 push ups or whatever you consider reasonable. This should be something that will take a month’s work to accomplish. After that point I would say commitment has been demonstrated and a purchase can be made.

At this point I would buy the best equipment I could ever see myself using. For instance, with the bicycle, there would be little difference for me between buying a $3000 bike and a $1500 bike. Even if I had a million bucks, I would not have the skills and strength to take advantage of the $3000 bike. The difference between a $750 bike and a $1500 bike would be equipment limited though. Therefore I would get the $1500 bike as the first bike although if you are only going to use it sporadically, I would consider needs vs wants and go a cheaper one, like this $1.38 mountain bike.

This avoids the upgrade malaise as there is no need to replace existing equipment with something better. It is simply not possible when you already own the best. This strategy has saved my thousands. Yes, so I’m wearing shoes that cost more than $200. However, these are very old shoes, so annual costs are closer to $20. Also, 10 year old $200 shoes look better than new $20 shoes any day.

It takes quite a while to replace one’s possessions with the best. Money has to be saved and also one has to wait until the old things wear out (or maybe that’s just me). After a decade, though, one will end up with a collection of really nice stuff.

There is less use of resources which is an added benefit.

Even better, should one decide to sell it, it tends to have a fairly high used price. For the very best, the used price is actually higher than the new price for a corresponding new item. This is true for HiFi equipment for instance.

See also “on minimizing depreciation expenses”

Originally posted 2008-07-27 15:23:40.

If you live in a small house, you can pave the floors with gold. If you live in a large home, this is not an option. If you drive a bicycle you can afford to drive the best. Few car drivers can afford to drive the best cars.

Now it may be that finely crafted bikes do nothing for you. In that case, just get a free bike on freecycle or get a cheap used bike on craigslist. If you want to indulge yourself, though, these are some very classy looking bikes.

• Velo Orange
• Rivendell
• Waterford
• Bruce Gordon
• Surly

I’m sure I forgot some here. Any others?

• Bikes are faster than cars

Originally posted 2008-12-19 17:09:12.

Originally posted 2009-03-20 16:03:44.

The idea that you need to be a millionaire is predicated on having enough investments to draw a retirement income of $40,000-$80,000. Studies based on long term market behavior show that one can draw down 4% of the principal and expect it to last 30-40 years if heavily invested in stocks. 3% would last a lot longer. Divide $40,000 with 0.04 are you get 1 million. $80,000 a year requires 2 million and there you have it.

However, I think time can be spent much better than working 15-25 years to accumulate millions of dollars. If you do like I do you can enjoy a $40,000 lifestyle for $11,000 instead. How is this possible? The answer is VERY SIMPLE.

Instead of buying everything as soon as I want it e.g. red peppers at $1.75, I wait and instead cook other dishes that don’t require red peppers. At some point the peppers will be on sale for $0.50 and then I cook dishes with red peppers with gusto . That’s 71% off or the difference between $40,000 a year and $11,000 a year.

Here’s another example. We recently got a fax/answering machine/telephone for $25. It took three weeks to find it, but if we had gone down to office max or ordered it on amazon, one of similar quality would have cost more than $100. So that’s 75% off for the same thing. Of course sometimes it’s less easy. We have been looking for a queen sized bed for under $200 for quite a while now. We got our present California king for $150 and sold the head board for $75 later for a net outlay of $75. What did you pay for your bed?

One may argue that it is not true financial independence to have to research one’s purchases, engage in comparative shopping, and then wait around for weeks. This takes time and effort. One has to be careful with the money and this is not what true financial independence is about, right? However, my counterpoint would be that if one has to spend 25 of the best years to save $2,000,000 just to avoid having to learn about quality/durability, bargain hunting, and how to be patient, then that is not exactly independence either.

Originally posted 2008-02-18 07:22:01.

You are a tool. You must be professional and not give any thought to anything else but doing your job. This is your life. Yours is not to reason why. Thinking is discouraged as it would distract you from your purpose of doing your part. Stick to your training and do what is expected and your career will proceed smoothly and you will be rewarded with the distractions that the machine produces to indirectly allow its own propagation through you. Quality distractions will keep you from thinking but not detract from your performance in serving the machine.

Living according to specification is what keeps the machine working. Imagine that a piston in a machine did not fit into the cylinder; imagine that a push rod did not want to push. If this happened too often, the machine would not function well and it might even stop working. Just imagine if you had a tool, like a blender, and it decided that it did not want to blend. This would be unacceptable and you would replace it. Tools must be dependable!

But do not worry, scientists and engineers are working hard to develop tools to replace you with more dependable versions even as managers and politicians are working hard to replace you with other cheaper and more desperate people.

As a cog, you must fit in and be a part of the machine to be useful. Voluntarily being alone and desiring solitude is a horrifying thought to a tool. How can it exist without depending on others and in turn being depended on? How can it be trusted to do its part if it commits to thinking on its own or acting deliberately? This is why individualism is discouraged. No, you must be social and the best way to be social is to seek out and consume the same distractions: fashionable clothing, TV shows, home renovations, … and support the machine in the same way, going to college, investing in funds, paying the bills, and pursuing a career as a professional.

Remember: Yours is not to reason why. Yours is to do your job and be successful, in the same way as everyone else.

The machine can only exist if you do your part.

This concludes today’s motivational speech!

Originally posted 2009-12-10 13:53:07.

The efficient market hypothesis can, therefore, easily be shown to be wrong. Yet it is still a good approximation which makes portfolio theory sufficiently mathematically tractable to write papers about it and win Nobel prizes, say.

Insofar efficient market theory is a close approximation of reality, the best trading strategy is not to trade at all (see paragraph 1). However, the more popular this becomes, the more difficult it becomes to estimate asset prices. Buy&Hold on a large scale, therefore, makes asset prices more volatile.

The more popular buy&hold becomes, the closer index returns will be to GDP growth, that is, around 3% in real growth. Any growth beyond this is rightfully attributed to investing becoming more popular, hence it is only possible to get the historic 10% returns, if you are actually part of the history where fewer people were equity investors.

When everybody becomes equity investors as part of their retirement strategy, buying and selling will not depend on whether business conditions are good (the prioritizing based on the individual merits of a business having already been destroyed by blindly investing in indexing) but on whether people are retiring(*). Hence, if large numbers of people are retiring, expect the markets to drop. If large numbers of people are entering the work force, expect the markets to rise. It would seem that retiring baby boomers can keep markets depressed for quite some time.

(*) This attitude is dangerous towards business conditions. Hopefully, professionals will keep trying to reward good companies insofar that they have the money to do so with more money being invested solely based on the stock price or current capitalization.

Originally posted 2009-11-02 07:17:13.

Why pay that much when you can make a better coffee yourself?

What about food expenses? These can range from less than $50/month per person to more than $500/month per person.

Required savings for $50/month:

$50/month = $600/year food expenses. This needs $600/0.04 = $15000 in savings. Whereas $500/month = $6000/year needs $150000 in savings. That’s a lot!

Aiming for the lower figure of $15000 is doable in a foreseeable number of years. After saving $15000 one NEVER needs to worry about food again. One is financially independent of the food expenses.

My suggestion is to tackle recurrent expenses in this way one by one. How much does it take to become financially independent of food, housing, clothing, transport, health costs, internet, movies, cable, …

This results in a set of smaller goals to work towards. It will also create a certain discipline. More importantly, it will make one reevaluate whether the expense is really worth it. For instance, is a daily cup of $4 coffee really something one would want to save $36000 to support or is a 25c homemade cup of coffee good enough?

A 25c/day coffee addiction costs a mere $900 for a lifetime “subscription”.

Originally posted 2007-12-05 00:47:00.

In retrospect, here slightly more than 3 years after starting the blog, the R-part of that name has turned out take have some annoying side-effects.

I found the crux of the matter to be that people have different and preconceived notions about what retirement means. Retirement has traditionally meant the part of life that followed a life-time of work. Retirement was for those workers who were broken down physically and sometimes mentally and unable to work further. The way industry had been set up meant that they could be replaced by a younger functional version much like a part in a machine.

As a more robust financial system replacement family dependence of having children, some people who managed to accumulate enough capital became able to retire a few years earlier than usual. A person could stop working even while being capable of continuing work. This was the first paradigm shift.

Traditionally households had a single income which meant that there were enough savings to support the household.

Recently, the idea of retirement has begun to change.

First, as households became poorer in real terms, single income households turned into dual income households. This now means that one person can retire while the other keeps working. This is the second paradigm shift. Here one person could retire several or even many years before the other.

Some people have also been able to push the age of retiring, that is, the age of no longer working for money far down. This is called extreme early retirement. This is somewhat different from using up one’s money until the pension rolls in. This is more akin to a lifetime of cash flows from investments that are not drawn down in value.

This is what I am talking on on this blog. This is the third paradigm shift. We have come pretty far away from the original definition of retirement: from someone who is too worn out to work to someone who has enough money so as not to need to work.

This is why early retirement extreme is a bad name.

Maybe financial independence extreme would be a better name?

Well, here the problem is that financial independence also has come to have many different meanings. For me it means having enough savings to pay for (finance so to speak) all my needs over a lifetime. Yet, for some it simply means not having any debt; for others it means having enough income to pretty much purchase whatever they want.

These definitions are even further removed from what I intend.

Another suggestion is “Independently Wealthy”. This is actually pretty accurate, except many people confuse “wealthy” (having money) with “rich” (spending money).

Consequently, I’m stuck with Early Retirement Extreme. Just make sure you don’t get stuck on your personal interpretation of what that’s supposed to mean, okay?

Originally posted 2010-12-12 20:48:47.

I believe that having a stay at home parent is a very good idea and I do not think I would do it otherwise. I had a stay at home parent myself. My mom stayed home full time for the first 6 years and after that she took a part time job, so we never came home to an empty house. This naturally plays very well into the idea of early retirement. Not only does financial independence and early retirement automatically provide someone who stays at home. It does not delay the working spouse in the sense that the spouse has to provide for two people.

I would not send my children off to cello lessons, travel soccer, or preschool where they could pretend to be intellectually stimulated at a rate of $1500/month by learning a few words of Mandarin. I suspect children cost exactly as much as you are capable of spending. You can buy their clothes at thrift stores just like you buy your own or you can buy designer outfits for them just as you buy designer outfits for yourself.

Their entertainment can match your own. I do not believe in the necessity of everybody having their own room. I think we could have two children and still stay in the RV.

Essentially, love and caring would be demonstrated through time rather than spending money. I would make sure they did their homework. I would encourage inexpensive and creative hobbies. There would be chores in the form of house work. I would certainly not try to fill their schedule with leadership activities and other brouhaha for their application to Princeton. I would make sure that they did their homework and no, I would never correct their math or their essays.

I do not think I would pay an allowance. Whenever they got a money gift (birthday, xmas) or any income whatsoever, I would make them put 50% into savings and let them spend the other 50% as they wished. I would let them spend the interest of their savings account hoping that they got the point. Success would be them voluntarily contributing to their savings account. In any case it should be very clear that money never comes for free.

Naturally I would give them the education in life skills that they do not get from their school. They would know how to read a balance sheet, double dig a garden, put up a shelf, and fix a flat before turning 18. Speaking of school, I would spend on the early years (primary) rather than the late years (college). The generalized skills such as work discipline and the multiplication table learned early are far more important than a course in Ancient Egyptian Algebra in my opinion. I would strongly encourage (insist) that they learn a trade before heading to college. I would probably not pay for a college education, but they would be free to stay here until they finish. I’d recommend a state university and make them fully aware of the consequences of being in debt to their eyeballs should they insist on a brand name college.

So, I do not believe that adding members to our household would materially change the possibility, form, and implementation of early retirement.

Originally posted 2009-01-28 13:09:05.

“It takes the self-discipline(*) of a celibate monk living in a brothel to survive on 20-30% of what most people earn in our current culture.”, said Todd. I would say it takes an extreme level of independence, confidence, and leadership to go against the stream. This is perhaps why extreme early retirement attracts so many INTJs as this personality type exhibits those traits more than most other types. “Surviving” is easy; it’s the “spending less than you earn” which is hard because it makes you different. To wit, consider two families. One earns $90000 and the other earns $27000. The latter is surviving on 30% of the former just fine. No problem. However, it would take a self-discipline and an independent streak for the $90000 family to not spend in the same way as their friends and colleagues. On the other hand, if those friends and colleagues were spending less, it would be no problem at all. It’s the “not fitting in” that’s hard. This is why the ERE forums have come to serve almost as a support group for what are typically highly competent people who “should” be spending 5 times more than they do, at least according to everybody else. Many of the questions actually deal with the grief caused by other “well-meaning” people who don’t get it, not by the actual “surviving”.

(*) Self-discipline is not that important. I eat take-out food on occasion. I sometimes buy things *gasp* new.

In defense of extreme frugality: First, it certainly does depend on your values. Those values are not always to retire early. For me my initial motivation was environmental having realized how much waste our consumer culture generates. It took me a couple of years to realize that with the high savings rate I had, I would be FI in just a few more years. I used to enjoy buying gadgets, a lot. This, incidentally, was what I enjoyed most about my stuff. Doing “consumer research” comparing specs, buying the gadget, and playing around with it for a couple of months after which I lost interest. Then I was onto the next gadget. Had I kept this up, I would still be working 60 hours a week, but I would have owned the newest iPhone and been driving a Prius or a Volt. It took a few months for my values to change but eventually I got as much joy out of not spending money as I did bringing home shrink wrapped boxes of new toys.

It is said that your need [for money] is inversely related to your level of skill. Money buys convenience but more importantly, it compensates for lack of skill. My favorite example is the malfunctioning toilet. Suppose your toilet fails to flush. Now, you could say that an extreme saver wouldn’t have the money to fix it and would thus quickly find himself in deep shitdiscomfort. However, an extremely frugal person would likely learn (quickly) or have learned to fix the problem himself. The end result would then be the same: A working toilet. So both solutions are ultimately convenient. However, imagine that the toilet broke Saturday night (don’t ask!) and you couldn’t get a hold of plumber until Monday morning. Wouldn’t it be more convenient if you could fix it yourself?

It takes time and effort(*) to learn such skills. I’m reminded by another quote by Illich which I paraphrase to something like “a man is educated in proportion to his ability to understand and affect his immediate environment”. In this regard most of us are barely out of the toddler stage. If we have a problem, many of us just call an authority. We usually pay others to “understand and affect” our environment because we just never learned ourselves. We’re like idiot savants who only understand one thing, our job whatever it may be, but we understand that really well to the exclusion of everything else.

This can change. Fixing a toilet, knitting a sock, building a bicycle, installing a compressor to make a fridge, and similar projects aren’t rocket science. It can be learned by anyone who can read and follow instructions. It’s just in this society that nobody does it. On top of this there is a tremendous sense of satisfaction in being able to say “I made that” or “I fixed that” that, at least for me, far surpasses saying “I bought that”. For me the latter always comes with a sense of shame.

To illustrate, I will think that your new sports car is nice and fun to ride in, but what really impresses me is a heavily self-modded truck that gets twice as many MPG running on bio-diesel or an electric scooter built out of conduit pipe, old frame parts, and discarded golf cart batteries. Standard cars mean nothing to me. Conversely, I understand that the LA dating scene is entirely predicated on the price tag of one’s vehicle.

So I may only be spending $6-7,000/year but do consider the value I’m adding using those monies for parts and optimized living and location compared to someone who is spending $60,000 blindly. We may just be getting the same value out of it.

Sometimes it is argued that the absence of money excludes certain things. This is correct, but they also include things which are otherwise out of reach due to the absence of time spent on the job. When you’re FI, things change. Things are done differently. It would be too expensive for me to take the family to France for a month every year. However, it would be entirely feasible for me to move to France (yes, I got an EU passport) and stay there for years because I don’t need a job, the plane ticket would be amortized, and I wouldn’t be supporting a house in the states. If I had kids I wouldn’t be able to afford expensive private schools, but I would have 12 hours a day to help them with their homework. I don’t have the budget to shop at Whole Paycheck, but I do have the time to garden. The same goes for sports. I can dedicate much more time to an activity which usually beats having a personal trainer and all the latest gear. There’s a strong limit to what money can buy which is easily surpassed with time and effort.

Conversely, using the examples above, someone who works for a living can’t afford to go to France for 1+ years because they certainly can’t afford to pay for two houses (unless they were saving 50% already) and they might be underwater on the “biggest house they could afford” which would make for a hard sell. If they’re high earners they’re likely economically better off if they outsource the raising of their kids, because they need to work to pay for “fun-time”. And who has the energy for serious sports and gardening if one works 60 hours a week?

Much more important than confidence and independence is the ability to envision the possibility of doing things differently. If you can’t wrap your head around it, you can’t set the goal, and without seeing the goal, you can’t get there intentionally. Many can’t imagine doing things for themselves instead of paying others. I believe this is the source of all the “I can’t live on $10,000/year”. To illustrate, $1000 will buy you a good bicycle. However, $1000 will also buy you enough parts to make SIX bicycles which are equally good. Most can’t imagine doing that—don’t you need a degree in bicycling or some such?! (But many are willing to stretch their mind far enough to maybe get TWO used bicycles of the same quality.) In the same vein a hundred bucks in carefully handled seeds will feed a family for months, organically too. A hundred bucks spent in a restaurant will feed a family for a day.

I see this as the greatest barrier for most people are this is to a large extent why I’m putting my life on public display. Of course this is just meant as an inspiration. The point is not to copy what I do but to understand the principles and the philosophy. For instance, I’m not going to move to France, but some probably will. And you don’t have to live in an RV. That’s just what I do.

Originally posted 2011-03-09 10:20:33.

If you ever used eBay, you’re probably aware of the downsides. You might get outbid in the last second (more on that below) and if you’re bidding on several auctions for the same thing, you have to coordinate the bidding in real time. In addition, you may have a finite amount of money which is insufficient to bid on everything, yet putting in bids essentially means that you have to have the money somewhere.

Sniping solves all these problems. I’ve used gixen.com for while. The idea behind sniping is that you enter your bid using the sniping platform instead. That way you have control until the last possible moment. This means you avoid getting suckered into bidding wars possibly resulting in a lower final price. Also you don’t commit money several days in advance, which also means that you have until the last possible moment to delete your snipe. Furthermore you can group your snipes so that if you win one auction in a group, all other snipes in the group gets canceled. That way I can put in bids for, say, 5 different hacksaws and have a reasonable likelihood of winning one of them.

If you already use eBay but haven’t “advanced” to sniping yet, I encourage you to try it out.

Some arguments can be made that sniping is morally evil and not in the spirit of ebay’s auction setup. On the other hand, it’s legal and others use it so until ebay changes its policy, e.g. by extending the deadline for an hour past the last bid, you’re at a disadvantage by not using it.

Originally posted 2011-03-01 15:59:46.

In case you want to join me or cheer for your favorite blogger, we’re talking about the Delta Century in the foreclosure capital of the world, Stockton, CA.

Forsooth, I could probably ride the 100 miles myself and thus save the $40 registration fee, but then I would be crazy, right? Therefore frugality takes a hit for the sake of appearances. I tried talking DW into joining me and doing the family ride (25M), but she wussed out. So-called experts say that a century is roughly equal to running a marathon (without the bone jarring impact), therefore I intend to train for it for at least a couple of days.

Now, the ride has 200 feet of elevation gain which according to my scientific estimate corresponds to roughly 400 speed bumps. I got a double so this should be a breeze. The thing that had me worried for a while was the fact that the event starts at 6am (which is cold) and ends about 6 hours later depending on speed (which is hot). I have some shorts, which are too short for “cold” and bib tight, which is too warm for “hot”. I also have my standard jacket which is too warm for “hot”. To make things worse, I have no storage space on the bike. Hence, I have been playing the world’s worst online shopper for quite a while. First, I figured I would get some leg warmers and maybe a long sleeved jersey. Then I figured maybe jacket instead of the jersey, some tights, and a bib short to avoid the double waistband syndrome. I have been turned around several times though. When it comes to shopping sites that tell you how much the price of things have been reduced, I’m certainly not going to buy anything that hasn’t been reduced by at least 20%. Second, if a site regularly sports sales gimmicks such as 10% extra off or free shipping on orders above X dollars, you can be sure that I am going to tailor the order exactly. It takes me quite a while to shop, however the special offers only last so long. However, since they are ongoing, I just change my order slightly from time to time. Another problem with online shopping for rebates is that sometimes my size is not available or worse, I don’t know what my size is, because the site does not give measurements. Thus they have been unable to close a sale on me. Too bad.

I finally came to the conclusion that I don’t need to buy anything. I’ll wear my shorts and put some running tights over them for the cold. For the upper body, I’ll use my arm warmers (which I already have) and put a sleeveless shirt over my cycling jersey. It may look quite unstylish, but it will cost nothing and it should fit inside my saddle bag and jersey pockets. I shall test it today and this weekend (Saturday’s post might be delayed).

Originally posted 2008-04-18 07:01:19.

“A man has two siblings. I am not going to reveal their gender, but I will tell you that he has at least one sister. What is the probability that he also has a brother?”

If you intuitively answered 50% (or less) you are not seeing the entire picture. If you answered 2/3, then congratulations, you got it.

Easy explanation: The gender of two siblings has four possibilities or outcomes: (Big brother, little brother), (Big sister, little sister), (Big brother, little sister), (Big sister, little brother). Three of those outcomes (the last three) has 1 or more sisters. Out of those 3 outcomes, 2 includes a brother, hence the answer is 2 out of 3.

This kind of problem is what Schumacher refers to as a convergent problem. Convergent problems asymptotically converge towards a solution. This means that ultimately, there are no unknowns and it can be solved. Science has a long tradition of dealing with convergent problems. Real life, however, are full of divergent problems that have no closed solutions. Witness what happens when those two worlds collide (rocket scientists on Wall Street). Problems with unknown unknowns are problems that must be lived through. It is problems such as trying to arrange for optimal happiness by going from poor to rich with the self-defeating outcome that this strategy ultimately makes you rich and thus no longer a user of the happiness-strategy. It is problems such as trying to run a country, a company or even your life.

People can be given a strategy and they can implement such a strategy in their life. However, a strategy for a divergent problem is not a solution. It is just a suggestion of tactics.

Jacob comments again:

Birth order has nothing to do with the original question. It was merely a way to count. Consider this then.

A man has two siblings. We know they can be either males (M) or females(F). There are 4 ways of randomly picking two siblings: MM, MF, FM, FF. Now, we know that at at least one of his siblings is female. Therefore both siblings can’t be males. This means that the MM outcome is excluded. This leaves MF, FM, FF all three of which as at least one female. The question is how many of those contain a male. Two of them! Therefore with the information given (two siblings, at least one female), the probability is 2/3. (MF+FM)/(MF+FM+FF).

Maybe it helps to consider the different question of what the probability is that the other sibling is ALSO female given that at least one of them is female: FF/(MF+FM+FF) or 1/3.

Originally posted 2008-11-19 07:12:31.

If you’re sitting inside or moving around outside and you’re cold, you’re probably doing something wrong. Here’s how to dress right.

Dressing right involves three layers.

1. An sweat transporting layer.
2. A heating layer.
3. A shell layer.

The most cost efficient sweat transporting layer is poly-… anything chemical really. The downside of chemical fibers is that they will eventually stink if not washed (say you’re on a trip). Wool is also useful, but it is harder to wash. If you don’t plan on sweating excessively, cotton is just fine. That’s what I use except if I’m walking or biking all day.

The next layer is the heating layer. Wool is absolutely and utterly superior. If you are used to wearing cotton or polyester, you have no idea. Since the legs contain major muscle groups, they supply their own heat. The arms are so-so, but the torso needs covering. Fleece is the second choice. Fleece also tend to retain smells. Cotton is the third choice.

The third layer is intended either to shield you from the elements (like rain) or look good (like a suit jacket). This layer should preferably not be insulated. In fact stay away from any “combo”-jackets where the shell and the insulation is combined.

Three layers!

What is the key message here? At least three (3!) layers. When dealing with the cold, two layers is acceptable but one layer is downright inadequate — you’re just asking for it.

The composition of the layers above is just a suggestion (but it’s a pretty good suggestion) and it can be modified. For instance, in an office environment, the first layer can be an undershirt or a t-shirt, the second can be a cotton shirt, and the third the woolen suit jacket; or expand to four layers by putting a thin sweater/crewneck under the suit. A neckerchief, a scarf, or its derivative, the tie, which prevents loss from the neck up can make a big difference. The same thing goes for a hat or a cap.

Remember: Three layers!

Most other cultures follow this prescription rather throwing money away to heat their walls. Invest in comfortable and warm clothes: a good sweater will pay itself back in one season or less.

Three layers!

Originally posted 2009-02-24 17:29:04.

Not so fast! While winning friends is easy, influencing people is a lot harder, but it can be done. I am a little dense when it comes to interpersonal understanding, but I have still learned a thing or two.

The first and most important thing is that a person sounds a whole lot smarter and more intelligent when you agree with what the person is saying(*). Most people listen to other people mainly to confirm what they already know and and be reaffirmed in their beliefs. This is not a very rational thing to do, but most people are like that probably due to humans being social animals. This means that if you suggest something, which is radically different from what they already know, they will think that you are ignorant and an outsider. If you keep pushing they will think you are stupid, a stupid person being an ignorant person who refuses to change his ways.

Therefore only make it known that you posses this information by talking about it once. Let them come to you when they are ready.

(*) If you don’t believe me, try to tune into a election debate. Candidates are very likely equally intelligent, but do they sound that way to you?

Most people (and especially children) will follow your example rather than your suggestions (if they follow at all). Children will follow practically any example (and believe anything you tell them, so be careful there), but adults are calcified already and usually want to follow their own example rather than your example unless it becomes manifestatively clear that your way is better. In other words you must be able to demonstrate a clear difference between your way and their way.

This means you have to build up a visible difference to show that there is an alternative (and build credibility). Once your spouse is ready, he/she will generally come around very quickly. For instance, you may build up a savings account or what people with bills, job-dependence and other liabilities call an emergency fund. If your spouse is already familiar with the concept, start talking about how your “emergency fund” will support you for 5 years, say, and that you are thinking about switching careers or taking a long hiatus. A 5 year fund is simply in another category altogether. It is qualitatively different because it gives you many more opportunities. A normal 6-month fund is only designed to pay your bills while you go and look for another job because you just got fired or carry you over while on an extended sick-leave Those, who focus solely on those problems will have a hard time wrapping their head around the larger time frame and the additional possibilities. However, if your spouse’s E-fund is only the standard 6 months, but she is beginning to think that her current life path sucks, she will most likely start saving more so that she will have the same options as you.

If your accounts are joint, you say you would prefer to save the money whenever she proposes an expenses. Just suggest that you split some money into his and hers and if she wants to buy something, fine, but you reserve the same amount of money for savings. After a while, you can start talking about the interest you are earning. One thing that tend to get people going is when I talk about how the money my savings generate on average correspond to a fulltime job in Walmart and how that essentially means that the person is working for me. I can put this in really snarky terms too using terms like mortgage and credit and it seems to get people thinking.

If you want your spouse to adopt some change, another thing to try is to find something they are familiar with. For instance, DW could not see herself living in a Tumbleweed House (my original plan), so I started talking about boats. Then someone suggested RVs. Now unlike me, DW had actually been in an RV and lived in a mobile home park at some point so she was familiar with those and was much less resistant to this idea. Had she not been, I guess one way would have been to start camping and make the trips longer and longer after which I would combine this with the suggestion that if we started camping full time we could cut our budget in half.

In summary, the sneaky way to go about things if you want to persuade someone is to change your environment to make your ideas seem more sensical e.g. try acquiring a majority of your stuff through swapping or freecycling. This might make your spouse reconsider the idea of paying for things especially when he/she sees the envelopes arriving by mail or you pick up a leather jacket while you proudly announce that you did not pay for this (BTW guys, I have not bought anything for me personally for several months now, but I have bartered(*) more than 10 things away, probably closer to 20). Get furniture used and make this the normal way for you. Mention that this month your expenses were completely covered by income from your investment accounts. Cook meals that only cost $1 but taste the same as $10 meals. Later you can start talking about how you don’t need to work anymore because you have enough savings to retire.

(*) I’m not sure bartering is the right term. Sometimes I swap 1-1. Other times, I give to person A and receive from person B making sure that I give as much as I receive to maintain a “fair” trade-balance. I ‘m working on this karma theory

None of this guarantees success, but maybe, just maybe, someday your spouse will have a problem that is best solved with one of your solutions and then you will be right there.

Originally posted 2008-09-04 06:35:16.

It is especially problematic when one such affliction is shared by a majority of people and the profit opportunity goes unnoticed by both the medical establishment and in particular the legal professions. To alleviate this appalling lack, I introduce a new personality disorder (all rights reserved, patent application pending).

Normal personality disorder

Onset is typically at the age of 3-6. It affects possibly more than 90% of the population and males and females are equally likely to be diagnosed with the disorder. The pathological behavior associated with the disorder generally follows from prolonged exposure to the educational system and mass media in developed countries. The disease may also be acquired by exposure to other people, whom the patient frequently associates with (horizontal vector transmission). Subsequently both private businesses and political parties take advantage of this induced syndrome, since patients are keen customers or reliable voters. Though the detrimental effects of the disorder tends to decrease slightly with increasing maturity of the person, it is untreatable in most cases.

Diagnostic guidelines

Conditions which are not attributable to duress or visible brain damage but meet the following criteria:

• A habitual reliance on exogenous opinions followed by a reduced capacity for independent thought e.g.
  • Tendency to support the opinion of others despite disagreement
  • Using the argument “All the others said …” or “All normal people …” to reason
  • Adoption of expressions/ways-of-speech heard from others
  • Adopting the religion and other values of patient’s parents
  • Susceptible to marketing and fads
  • Ordering “whatever he had” when eating out
• Chronic patients may develop neuronic atrophy causing reduced capacity for deep thought. This can be expressed by e.g.
  • Inability to solve own problems
  • Belief that “They” will or can solve any problem
  • Tendency to seek advice of others before thinking
  • Only simple activities (TV, snacking, …) provide pleasure
• Individual opinions are subconsciously suppressed to alleviate severe group-induced stress (peer-pressure)
  • Extremely sensitive to obeying rules, following tradition, and fitting in
  • Belief in authority and rules
  • Supportive of the majority
• Fear of being different or marked as different leading to sociopathological behavior
  • A deep fascination for superficial things such as fashion, popular music and parties
  • Observes rituals
  • Attempts to emulate the appearance and behavior of others
  • Has an “Us vs. Them” attitude (always roots for the home team) which is occasionally expressed violently
• Follows a pervasive pattern of social attachment to the/a group, while displaying the full range of emotions likely to elicit a positive response leading to adoption by the group. This is usually accommodated by feelings of angst of being excluded from the group. Some indicators are:
  • Desires to be popular (or a megalomanic desire to be famous)
  • Puts great importance on being a team player
  • Accepts and uses so-called white lies (“no, that purse does not make your butt look big”)
  • Appears superficially interested in other peoples problems
  • Affinity for shallow interpersonal relations
  • Inability to sustain isolation from other people more than a few days

Diagnosis

People suffering from this disorder are generally afflicted by three or more of the following:

1. Own more than three CD compilations of “Most popular hits..”
2. Do not think it is odd to discuss the weather with strangers (even if they are meteorologists)
3. Do not read books unless part of the curriculum
4. Think math is hard
5. Watch TV
6. Like to watch sports and/or news
7. Have a personal opinion on one or more of the participants in a reality TV show
8. Have one or more idols
9. Have at least ten best friends
10. Have a political opinion which matches that of an existing political party
11. Can name ten or more brand names

Treatment

Normal personality disorder is not yet recognized as an actual disorder and therefore it is not recognized by the established medical community. The reason is that the implementation of industrialization and modern democracy requires a large fraction of the citizens to be afflicted with this disorder in order to willingly submit to a lifetime of working and consuming without having any significant control of their own life (also known as “making a living”). The disorder is thus considered a benefit, at least in the aggregate, to the power structure.

However, a form of therapy, where the individual is removed from the group influence and gradually taught to think independently has been successful in several reported cases.
As trust in own abilities develops, the normal patient may learn to form independent conclusions. However, in severe cases these abilities have to be acquired first, in particular, if the patient’s skills mainly comprise the ability to select the right shopping outfit along with a keen knowledge of celebrity crock. Successful treatment will eventually allow the patient to independently evaluate his own behavior. This may result in a rather jaded and cynical outlook, which again may lead to some real life changes such as riding a bicycle or canceling the cable TV.

Originally posted 2009-05-21 05:08:01.