For most of us, the need to earn money is just a part of life. We have rent to pay, bills to meet, and somehow, by the end of the month it seems like there is never much left over – and that’s if we’re lucky.
This dependence on income can quickly become stressful and, ultimately, limiting to our lives. We do things not because we want to, but because we need the money. And too often, our life choices come back to the question: “Where will the money come from?”
That’s why the idea of financial freedom is so alluring. No longer does money determine the choices you make and the actions you take. Instead, you are free to pursue what you want to pursue, and on your own terms. For me, that means time to spend with the people I care about, freedom to pursue work that delivers an impact, not a pay check, and the space to follow my interests without having to think about their potential monetary value.
These are all things I care a great deal about, so when I came across the Early Retirement Extreme (ERE) concept some years back, I was instantly curious. Here was a guy saying that you could be financially free within the space of five years, by saving 80% of your salary over that time and investing the proceeds (how to invest is of course a huge topic, and one that I intend to address in future posts). Most importantly, this wasn’t just for people on vast incomes – it was a principle that could, in theory, be applied to any income and any situation, financial independence for all.
For those of you curious about the assumptions made in the calculation, and who might want to plug in your own numbers, there’s a very handy calculator of your time to financial independence right here:
So, the real question – how realistic actually is this for your average person?
Before we weigh up the pros and cons, let’s hear how the founder of the ERE movement, Jacob Lund Fisker, describes ERE on his wiki page:
“Early Retirement Extreme (ERE) is a movement of individuals integrating ideas from anti-consumerism, DIY, the Renaissance man ideal, home economics, individualism, environmentalism, and rentier capitalism toward the goal of achieving financial independence extremely rapidly. Putting ERE principles into practice yields a lifestyle that meets all needs while minimizing ongoing inputs of money, natural resources, friction, and effort.”
Jacob goes into all these points in his book, “Early Retirement Extreme: A philosophical and practical guide to financial independence” – which I can recommend for anyone who wants to go deeper into the topic. For now, though, I would like to start by highlighting what I think Jacob has got right with ERE.
The ERE philosophy draws on a holistic approach to maximize efficiency. To take a basic example, consider that your three main expenses are most likely housing, food and transportation. The efficient ERE option is to find cheap accommodation right by your work, and eat all possible meals in the subsidized work canteen. By looking at housing, food and transportation together, you have eliminated transportation costs from home to work, and minimized housing and food costs at the same time. Consider the savings you would make adopting this approach when compared against an employee on exactly the same salary who lives in a far away suburb, drives to work in a gas-guzzling car, and goes out for all his meals. Is he really improving his quality of life by spending all that extra money?
Consumerism, lifestyle and the individual
ERE very much encourages you to do and experience for yourself as opposed to pure consumption. So if you’re interested in music, you learn to make music rather than paying for gigs all the time. Or if you love sport, you get involved rather than paying a fortune for tickets to sporting events. Basically, you should go your own way and do your own thing, and that’s something that ends up reflected in the ERE perspective on lifestyle and the individual in general. Lots of people end up going through something termed lifestyle inflation as they get older, spending more and more as their earnings increase. Bigger houses, more stuff, expensive schools – most people do this almost automatically and assume that it is increasing their quality of life. In fact, though, what they are also doing is compromising their financial freedom. ERE is a plea for us to take stock and examine our own individual values and priorities.
Most people earn their money in a specialized niche, and then use that money to pay for everything else. ERE encourages people to become more self sufficient by developing generally useful skills – some basic DIY, perhaps, home cooking, or a basic financial education. This isn’t just about saving money, it’s just as much about personal satisfaction, improving your quality of life, and helping you to become a person with the skills to thrive in an unpredictable world. Self sufficiency also ties in with the efficiency and lifestyle concerns we have already discussed in this post. For instance, does it make sense for a couple to pay a nanny to look after their children so that they can both earn money full time? Maybe it would be a better idea, from both an economic efficiency and a lifestyle standpoint, to have the lower earning parent take over this responsibility.
By now, I hope you can see that there are things we can all learn from the ERE movement. So let’s turn our attention now to the question of whether it is a realistic prospect for a person on an average income.
The extreme difficulty of achieving an 80% savings rate
As you can see from the chart of average household savings rates across selected OECD countries, a savings rate of 80% would be quite exceptional. But is it even possible?
Well, let’s take me as a guinea pig. Conveniently, I earn around the UK average income, so I should be a reasonable test.
For 2017 so far, my immediate obligations (housing/food/transportation) amount to 64.3% of my total income. That means my best possible savings rate in my current situation – spending absolutely nothing on entertainment, clothing, medical, holidays and the like – would be 35.7%.
How far could I realistically improve this? Well, I already work from home, have no car and therefore minimal transportation costs. And I am already generally sympathetic to the ERE philosophy. The area I could cut down on is food, where I eat out more than I should. But even then, living like a monk, I see no way of getting past a 45% savings rate without relocating.
And that, really, brings us to the crux of the matter. I could get to an 80% savings rate if it were my absolute number one priority. I’d probably have to move to Thailand and live off noodles to do it, but it is possible. It’s all a matter of choices and what you are willing to sacrifice to achieve your goals. Jacob lived in an RV and survived off stuff from his garden – that was his choice. For me, that is too extreme and the sacrifices don’t justify the reward, but we all have to make our own judgment.
What do we conclude, then? Well, I’d certainly encourage you to go and take a look around the ERE website at earlyretirementextreme.com if you’re curious about the topic. If you’re anything like me, you’ll find that there are some interesting concepts there that you can apply to your life even if you don’t want to go the whole hog. And at the very least, I hope it inspires an awareness in you that there is more than one way to approach money management – and that, maybe not in five years, but not too far down the line, we can all enjoy the freedom that financial independence brings.