Your money or your life

(First published in the April 18, 2019 issue of City Pages)

The personal money management concept of FIRE — Financial Independence, Retire Early — can do wonders


Ryan Lichtenwald and Allie Reiser on their two-seat electric bicycle that they use not only for recreation, but also for day-to-day errands. Though neither is over age 30, budget conscious choices like this have put them within a few years of “retiring.”

Stepping into the house of Wausau area couple Ryan Lichtenwald and Allie Reiser, you might not think they’re much different from any other middle class family. It’s a beautiful 2,500-square-foot house on the lake, nicely decorated and furnished. They have an electric bike that seats two, and kayaks. It looks pretty typical.

But the couple might be some of the most frugal people you’ll ever  know. Their bikes are used for transportation. Many of the things they buy are used or found through relatives. The house itself was a foreclosure they bought cheap and fixed up, doing most of the work themselves. They even had a roommate to help defray expenses.

And thanks to saving and investing more than half of their income, they are —he at 30 years old, she at 28— just a few years away from financial independence. Which means, not being tied down to a job.

Lichtenwald and Reiser are part of a movement called FIRE—the acronym for Financial Independence, Retire Early. It’s about rejecting the notion of working 9-5 every day until you’re 65, then trying to enjoy life in your senior years. Under the FIRE concept, you save early and amass enough wealth to “retire” at a young age, maybe decades before the typical 65-year mark.

The FIRE movement is attracting people of all ages but especially those of the millennial generation. Once a person saves 25 times their annual expenses (not income, but expenses — we’ll delve into that later) they’re ready to retire. The higher the savings rate, the sooner retirement comes. Retirement doesn’t necessarily mean you stop working; it just means working becomes optional, which, as you can imagine, opens up a world of possibilities.

I’ve been following the FIRE path for several years. The basic premise is simple: Live below your means, invest the difference in low cost index funds, and build wealth.

On a day-to-day basis that means no cable or satellite TV (Netflix or other inexpensive streaming services is an easy substitute), low cost cell phone plans, limiting restaurant and drink outings, finding fun in low cost activities (board game night, anyone?) and using your muscles instead of motors.

You wouldn’t believe how much just biking to work or other errands saves money, for example. On average in the winter I will fill my car’s gas tank maybe once per week, for $100 per month (that’s with a fuel efficient Mazda3). I’ve gone entire summer months without buying gas at all. That’s $100 extra dollars in my pocket (just kidding, in my investment account).

Little things like this add up to thousands in savings per year.

And all that money you’re saving goes into low-cost index investment funds, such as VTSAX with Vanguard. The data is pretty clear, from Nobel Prize winning behavioral economist Daniel Kahneman (read his book Thinking, Fast and Slow) and others who have studied this: Most actively managed funds don’t beat the market — 85% underperform the index after 15 years. The percentage of those funds that outperform the market after 30 years? Less than one percent. Warren Buffet is the exception. Thinking you can match his results is like thinking you can hit a fastball like A-Rod.

The popular blogger Mr. Money Mustache was my first exposure to the FIRE concept. He’s considered the godfather of the movement, with his snarky wit and “facepunches” dolled out for excessive consumer waste.

Before him was Early Retirement Extreme. There are others: the Frugalwoods; Jim Collins (who has a summer home in Wisconsin now); Physician on FIRE; Budgets are Sexy (I have pretty regular conversations with its Washington, DC-based founder, J Money). One of the first books to highlight this idea is Your Money or Your Life by Vicki Robin.

They all come from different places, but the idea is the same: Americans tend to waste their money, and by living a “slightly less ridiculous lifestyle,” as Mr. Money Mustache puts it, that excess money can be saved and invested in order to achieve financial freedom to varying degrees.

In general, FIRE is about thinking long term instead of short term.

The latte effect

FIRE forces you to have some very strong conversations with yourself. Where is my money going? Why am I in debt? How do I get out of it? How long do I want to keep working?

The foundational idea is seen in what’s called “the latte effect”: $4 for a latte might not seem like a large expense, but think of it in the bigger picture and calculate it out. A $4 latte equals $20 per week, $80 per month, $960 per year and, under the calculation Mr. Money Moustache likes to use, $9,600 over ten years.

That’s not even counting the opportunity costs from not investing that money. Using a compound interest calculator, that daily latte is costing you $14,196 per decade. Just for some fancy coffee.

But focusing on the latte itself misses the point. It’s not just about coffee. There are multiple little expenses hiding throughout everyone’s lives. This doesn’t mean you should never spend money. It’s about recognizing the true, long-term cost of your purchases and determining whether they’re worth it.

Let’s take cable TV as an example. On Spectrum’s webpage right now, a basic cable package is $45 per month (for one year, then it goes up; but let’s keep the numbers simple). That’s $540 per year, and $5,400 per 10 years, not even factoring in opportunity costs.

Restaurants are a good example too. One of the first changes I made was to stop eating out for lunch during the work day. Instead of spending $10 on lunch every day, I’d spend maybe $2 for a packed lunch. That saves $40 per week, $160 per month and $1,920 per year. Which comes to more than $12,000 in a decade, calculating investment interest.

Hedonism and the 4% rule

Another principal in this equation is the idea of hedonic adaptation. That’s a fancy way of saying you get used to stuff, both good and bad. Let’s say you buy a new leather jacket. It’s pretty slick and you feel pretty cool wearing it.

Fast forward a year. You reach for your jacket without thinking about it. It’s just your jacket now, and you’re used to it. That thrill is gone. You’re tempted to spend more money on something to get that thrill back. Repeat the cycle.

Hedonic adaptation is the psychological principal that no matter what you buy, the shiny new thing factor will wear off. This applies to everything from the smallest knick knack to a car. Buying things becomes a search for the next thrill, which wears off eventually.

But when you become aware of thrill buying—and instead do a quick mental calculation of the long-term cost—you start to lose interest in buying things unless they provide long-term value.

The 4% rule is another key element to FIRE: Once you’ve saved 25 times your annual spending you’re retired. It’s important to note “spending.” Your income is irrelevant to this calculation, because spending is what you need to cover in retirement. Under the 4% rule, once you’ve saved 25 times your annual spending, you can retire, withdrawing 4% from your portfolio per year.

Where does this financial magic come from? The Trinity Study, conducted in 1989 by researchers looking at 70 years of historical stock data, found that a portfolio during a 30-year period nearly any time in that 70-year period would survive intact by withdrawing 4% per year. A 3% withdrawal rate is even safer.

Using this as our basis, reducing your spending then works both sides of the equation: You’re saving more toward financial independence, while at the same time reducing the amount you need in retirement, since your lifestyle is less expensive.

Who is it working for?

Lichtenwald and Reiser have been living the FIRE lifestyle since 2013. Thanks to a high savings rate, they are a few years away from being financially independent, at which point work becomes optional.

Lichtenwald and Reiser might not look frugal on the surface, but they got to this point by being conscious of spending. They shop at Aldi and farmers markets, don’t eat a lot of meat, and eat nearly all their meals at home—mostly healthy but inexpensive foods like lentils and beans, and hummus made in big batches.

They can use the electric bike or regular bikes to get around, and Lichtenwald works from home for a FinTech conference company, saving any commuting costs. They’ve typically had a roommate to help cover expenses. And their furnace thermostat is set to 60° most of the time, with a fireplace for some additional warmth.

The couple goes on vacations, but using travel miles through credit cards and Airbnb. They do inexpensive tourist activities like enjoying hikes.

The FIRE lifestyle isn’t about living on cat food or clipping coupons. Lichtenwald says it’s more about being hyper conscious of purchases and where your money is going. Reiser says the main three areas to optimize are food, housing and transportation.

The great thing about the FIRE mindset is that it’s scalable, Lichtenwald says. I agree. Although FIRE typically advocates for a 50% or higher savings rate, even 20-30% savings is above average for Americans. And if you’re just starting out in the workforce, even smaller percentages add up because you have more time for the interest to compound.

The rewards of this lifestyle show up even before you reach any kind of early retirement. Within a short period of time you develop a financial cushion that can help greatly in an emergency, such as a large unexpected expense, or even the loss of a job. Knowing you can float yourself for a few years, no matter what, helps you sleep a little better at night.

Steps toward FIRE

Even if you don’t want to go full FIRE, one or two of these tips will help reduce spending (these are all things I do myself):

•   Eat at home more, learn to cook: Your grocery bill will go up but your spending overall will drop dramatically.

•   Make dollar stores your friend: It’s surprising how much you can save here. I get many of the same personal care items there much more cheaply. I also buy several of the items at a time to save on trips to the store.

•   Cut down the energy bill: If you’re not wearing sweaters indoors in winter, you’re doing it wrong. Utilities are one of the biggest expenses in a household, so cutting back makes a huge difference. My thermostat sat at 64° all winter and I recently lowered it to 62°. I also unplug nearly everything in my house except things like the refrigerator.

•   Buy it later: When I was a kid, I wanted a really fancy pair of sneakers. My dad took me to the mall with my Christmas money and said, “OK, if you want to buy these shoes, you can. But we’re going to run other errands first and if you still want them, you can buy them.” After we returned, I had changed my mind. That lesson about impulse buying has stuck with me since. Think about purchases, make sure you really want them, and save first.

•   Walk or bike when you can: Use a bicycle (or your own two feet) to run errands within two miles. It’s cheaper and healthier.

•   Debt is bad: Other than a mortgage, Mr. Money Mustache says debt should be treated like a hair-on-fire emergency. Pay down what you do have and don’t take on additional debt.

•   Spend with purpose: Just like Marie Kondo asks people to think about the items they own, FIRE asks that you really think about what you spend. No more retail therapy.

•   Want to connect with like-minded people? Check out the ChooseFI Wisconsin group on Facebook, where you can find other FIRE-oriented folks and get info on future meetups.