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Creating Freedom Through Financial Independence

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Financial Independence Backup Plans – Part One

January 26, 2019


Let’s face it.  Sometimes our hope of a perfectly smooth future turns out to be a little misguided.

This applies to those in the workforce as well as those who retire early.  All of us need backup plans in place for times when things get a little rocky.

For example, Australia is bound to go through a recession in the future.  Although you’d be forgiven for thinking they don’t occur anymore, given it’s been almost 30 years since the last one!

Either way, we need to know what we’ll do in such a scenario.  Specifically, how will we sustain our Financial Independence?

There are three factors at play here – our investments, our spending, and probably the most important of all… ourselves.  So let’s dive in and find some concrete ways to make sure we make it through to the sunshine and green grass on the other side!

 

Introduction

Before we start, I don’t think there’s any bulletproof investment plan out there.

You can use history as a guide to see how reliable an asset class is at delivering long term returns.  You can even pair investments that zig when others zag.  But it still doesn’t tell you the future.

Investment markets are always uncertain.  So we can’t perfectly predict how smooth, or otherwise, our income will be in early retirement.  Therefore, we need a plan.

A word of warning:  I’m about to pull a bunch of numbers from my backside and create a totally made-up scenario.

Let’s imagine we have a nasty recession.  And the sharemarket drops by a very ugly 60%.  Historically that’s extremely rare, but not impossible.

In that case, it’s possible that dividends paid by companies would drop by 40%.  So we’ll make this our scenario for today.

Since many market participants don’t care about dividends, there’s little long term data available.  But history and common sense suggests that dividends, on average, tend to be less volatile than share prices.

So for us, if our dividends and spending were roughly equal – $45,000 per year – our income would drop by $18,000.  Our new retirement income would be $27,000 per year – a bit of a cut!

Our FI life is ruined, right?  This whole thing blows up because we retired too soon with too little?

Are we completely unprepared and already living too frugally to cope on this lower income?

Let’s find out…

 

Financial Independence Backup Plan #1 – Optimise Spending

The first logical solution to a drop in income, is spending less money.  Just like you’d need to if you got a pay cut at work.

Given we’re already somewhat frugal, you might think this isn’t an option.  Indeed, my buddy Aussie HIFIRE just wrote a post about this here.  And I know many people feel the same.

The main argument being, for low to moderate spenders, most living costs are fixed and unable to be adjusted down.

While I understand this viewpoint, I simply don’t believe that’s the case at all.

The issue I have, is with the often used term ‘fixed costs’.  In my view, there’s no such thing as fixed costs. 

Now, certain costs may be fixed in your mind, I get that.  But not in reality.  There’s no written contract for your household spending which runs in perpetuity.

Of course, there is such a thing as fixed needs.

 

Wants vs Needs

Consider this…

Housing:  You need a roof over your head.  But you don’t need the house you’re living in.

Food:  You need food to eat.  But you don’t need the food you’re currently eating.

Transport:  You need to go places sometimes.  But you don’t need to own a vehicle (or 2) to do that.

You get the idea.

Our needs are very real.  But nowhere are you forced to spend $X on these things.  So while the need is fixed, the cost is not.

And if you’ve been around this blog a while, you’ll know I put most sweet perks of Western life in the ‘wants’ bucket, not the ‘needs’ bucket.

Hell, even though some consider it frugal, a good portion of our own spending is optional.

Therefore, I maintain that lowering our spending is entirely within our control, if we want it to be.

Because when you break it down, we need very little to live a good life.  For the average Aussie, the fact that you’re reading this means you’re among the wealthiest people in the world, at any time in history.

Yes, I know it doesn’t feel like that – more on this later.

We live incredible lives in modern developed society.  The kind that would be unbelievable to folks just a few generations ago.

So we need to stop and think for a minute to gain some perspective.  We have to realise how lucky we are.  And how everyone managed to live perfectly well without most of the things we have today.

Only then can we truly recognise the difference between ‘wants’ and ‘needs’.

 

A Case Study

Let’s use our recently published annual spending, so you can see this in action with real numbers.

If things got tough in retirement, how much could we reduce our spending?  Let’s have a look…

 

Housing:  $21,000

Well, we currently live in a 4 bedroom house which backs out onto a gigantic regional park.  Given there’s only 2 of us and the odd guest staying here, there’s no way this type of house is needed.

We could easily move into a 2-3 bedroom house in a regular neighbourhood and save $3,000 per year.  We could even move out a little further and spend $300 per week instead of the current $400.  Remember, no need to live near work, this is retirement after all.  Total saving: $5,000.

 

Travel (interstate family trips, plus local country trips, including spending):  $5,570

You could argue this entire category is optional.  But if we wound this back, you could easily more than halve this expense.  Total saving: $3,000.

 

Cafes, Restaurants:  $900

Again, all entirely optional.  To continue to enjoy social outings, we could still spend $400 or so.  Total saving: $500.

 

Garden:  $1,150

We could definitely be more selective about our spending on supplies here and start planting only cost-effective crops.  Total saving: $500.

 

Public transport: $800

Currently this cost is entirely for Mrs SMA’s part time work, so this would be zero in an early retirement disaster scenario.  Total saving: $800.

 

Gifts (for others and our household):  $1,500

Sorry everyone, but this is also entirely optional.  Adults exchanging gifts is nice and all, but it’s not exactly a need.  Bonding with others is better done through helping each other and being there for one another – not swapping products from Westfield.  Maybe we’ll do small gifts for each other, and continue small gifts for others, spending $500 in total.  Total saving: $1,000.

 

Petrol:  $730

Obviously we’ll be driving around less if we’re buying less stuff, taking less trips and trying to optimise.  Total saving: $200.

 

Charity Donations:  $420

We can ramp this back up later when things get back on track.  But this is not an immediate need, more like a lifelong goal.  Total saving: $400.

 

Clothes/Accessories and Other (random household expenses): $950

We’ll obviously be watching the ‘random’ expenses closely.  And if we’re honest, the clothes we have now are probably fine for the next 5 years.  Maintaining our independence is more important than staying ‘on trend’ – ha!  Total saving: $600.

 

The Result

That’ll probably do for now, even though I can see way more options in there.

In fact, I reckon we could come up with a way to plug the entire gap, through lower spending alone – and I’m one of those sick, twisted people who’d probably enjoy the challenge!

But we’ll leave it there to remain ‘reasonable’ 🙂

The premise of these savings is based on the fact that if something is not a necessity, then by definition, it’s an optional extra – a luxury.

Most of those optimisations simply give us a slightly more frugal lifestyle than we have now.  We still get to do pretty much all the same stuff, just a little less, or in a more cost-effective way.

Adding this up, the total made-up savings come to $12,000.

And notice we haven’t yet resorted to using both sides of toilet paper or drinking rainwater through our socks!  Not bad!

Remember, our ravaged retirement income dropped by $18,000.  This means these savings ideas cover two-thirds of that spending gap.

Our lower retirement income falls to $27,000.  And our optimised spending falls to $33,000.  Honestly, that’s pretty good.

So our investment cashflow drops 40% and there’s only a $6,000 per year shortfall.  All because we’re adaptable and able to flex our frugality muscles when the time calls for it!

Remember, this is in a pretty terrible and scary situation – likely a global economic meltdown and an Aussie recession.  So, it’s unlikely you’ll feel comfortable spending as much as before, even if you wanted to!

Our only ‘job’ is to make it work and sustain our Financial Independence.  Why would we not do this?

 

Other Considerations

Now, some people say they own their home so you can’t optimise that.  Not quite true.

If we owned the rental we’re in, we also have the opportunity to downsize.  Given this place is probably worth around $450,000, we could move to a lower cost house a little further out for $100,000 less.

And guess what?

If you live in more expensive housing, your opportunity for savings is greater.

After taking costs into account, we’d still be left with something like $60,000-$75,000 in hand.  That could either be used to top up our income shortfall, or buy some now higher yielding shares, given the market crash/recessionary conditions.

The move also means lower council and water rates going forward, since those are roughly based on the land or rental value of your property.  Similar to the rental scenario, we’d be better off by thousands of dollars per year.

Given many of us live in homes bigger than we need (we’re a prime example), moving house to reduce your footprint shouldn’t be off the cards.  So the house excuse is out.

As I’ve said before, there’s almost always a way to find spending improvements in every category, if you really want to.

So I hope my point is clear.  Reducing spending can easily be done, even for those people with low or moderate spending like us.  It’s a simple matter of separating your wants from your needs, and being okay to change things up.

Calling them ‘fixed costs’ certainly makes things easier.  Because this implies there’s nothing we can do about them.

But that’s simply not true.  And framing it like this only creates a restrictive and somewhat pampered mindset, which isn’t helpful.

Again, there’s no contract in place which says those costs must remain exactly the same, should things get a bit rocky in our early retirement.

 

Oh, won’t someone think of the children!

Now here’s an argument I can’t win, since I don’t have kids.  And some of you will probably hate me for it!  But I have to comment.

Why?  Because it’s just too convenient an excuse!  So let’s dive in.

The comments I’ve seen from people is that it would be terrible to have to cut back on spending or alter your lifestyle because of your children.

That sounds fair enough.  But here’s the thing…

Are our standards so damn high as a society that we think it’s a disaster or a failure to our children if we spend less money or move to a smaller house?

Teaching our kids to be open to change and learning to be adaptable is an incredibly important life skill, that for some reason, they’re not allowed to learn anymore.

Instead, we cater to their every whim and try to protect them from any hardship or pain.  Which all sounds reasonable.  Only that it’s counter-productive.

A young person who grows up learning that sometimes things get a little harder so you need to adapt, and it’s not always puppies and rainbows, will be far better equipped for adult life, than those who are coddled and made to feel like they’re entitled to everything they have and it’s somehow painful without it.

Whether we mean to or not, this is the message we’re often sending.

Alternatively, teach your kids that it’s perfectly possible to live a good life without half the lifestyle we have today.

How do you do that?

By learning how people live in other countries.  How Australia has some of the highest living standards globally.  How pretty much all of us right now are in the richest 1% of the entire world’s population.

And finally, by recognising how much our incomes have grown over the decades, and we simply decide to spend it all on completely optional luxuries, when the cost of our necessities as a percentage of our income, is lower than ever before.

That’s not a matter of opinion.  It’s a fact.

 

What’s Your Job?

Sometimes this comes back to whether you feel your job is to give (spoil) your kids as much as possible.  Or whether you think your job is to teach your kids as much as possible.

The first one does them long term harm and robs them of learning valuable life skills.  The second is far more positive – it equips them with a basic fundamental knowledge of the world and their (very fortunate) place in it, which will stay with your kids and help them throughout life.

A good example is funding your child’s first car or their house deposit.  Sounds like a big help, doesn’t it?  Best parent ever, check!

But that young adult is robbed of the chance of learning to work hard, manage money efficiently and save up to accomplish goals through their own efforts.

That great sense of achievement they’ll feel, and pride in their own ability has been taken away.

See the difference between what feels like helping and what actually helps?

So the ‘providing the best life for my child’ excuse is out!  Teaching them lifelong skills like resilience, adaptability, money management, gratitude and perspective is in!

 

Mindset and Comparisons

Here’s where people differ.

This all sounds perfectly reasonable, or absolutely insane, depending on who you are.

But if you think it’s crazy, stop and think for a minute why that is?  Is it because you think it’s not possible to live a happy life with less money?

Have you simply become accustomed to your cushy lifestyle and can’t imagine life any other way?

Don’t feel bad.  Most of us do it!

But it’s important to recognise that people lived perfectly satisfying lives before an iPhone was invented.  Before overseas holidays were a thing.  And before all of the niceties we see around us in a modern Aussie life.

The fact is, our happiness does not scale up with luxury.  Therefore, it doesn’t scale down with simplicity.

Think about it.  Older Aussies lived perfectly happy lives without half the crap we have today.  And people in many parts of the world still do.

Hell, people in other countries would kill to live the way we do!

So we need to stop comparing to our peers, which is a small and incredibly biased subset of people.  Or worse, those living more exotic lifestyles than us, like celebrities.

That’s in no way an accurate representation of the typical human life experience.  Not even close.  So it shouldn’t be our benchmark.

I hear what you’re saying, “yeah but we just live an ordinary Aussie life, it’s not luxurious at all.”

That’s exactly my point!  An average Aussie life IS luxurious, when we put things in perspective!

Because we should be considering the many billions of people who don’t have it as good as us.  And all the generations that came before us.  Not just a couple of friends at work who are ‘living it up’, or a few ultra-rich personalities on TV.

Even the most basic modern life is amazing, so open your eyes and learn to be grateful.

 

The Spoiled Country

It’s often said Australia is a lucky country.  And there’s lots of reasons for that.

No recession for almost 30 years is one.  And that statistic is pretty damn impressive – a world record in fact.  But even that has drawbacks.

One being, most of us have never known hard times.  Now that actually sounds like a good thing.  But I don’t think it is.

We’ve grown accustomed to a relatively smooth economy and a healthy jobs market.  So we tend to think it’ll always be this good, and promptly spend all our money, as there’s always more where that came from!

I think many of us have lost the ability, or at least, the willingness, to live through a bit of hardship.  We either think it won’t happen, or it’s up to the government to protect us.

But hardship and change are actually good for us.  It strengthens our character and makes us more resilient people. 

By implying that our standard of living is deserved, necessary, and should be protected at all costs, we’re convincing ourselves that we can’t cope with less money and that a less luxurious life is bad.

This mindset will bring us great pain if we’re forced to live through any lifestyle that is less expensive than the one we live now.

In short, if we can’t imagine spending less because we feel entitled to everything we have – that’s a weakness and there’s no question, we’re spoiled!

 

Summary of Part One

By now you can tell I believe the most important factor here is our mindset.

When the shit hits the Financial Independence fan, we need to adapt.  So that means focusing on what we can control.

We can’t control the sharemarket.  But we can control our personal flexibility and spending.  And as you can see, even those of us with lower spending can comfortably adjust to any new reality we find ourselves in.

By keeping a global and historical perspective, we can remind ourselves how incredibly lucky we are, that so much of our spending is optional, and even a simple life in Australia is amazing and puts us firmly among the global elite.

If you’re still unwilling to reduce your spending should retirement get a little rocky, that’s perfectly fine.

But that’s not because our costs are fixed.  It’s because our mindset is fixed.  And it’s not because it can’t be done.  It’s because we don’t want to do it.  There’s a big difference!

So far we’ve only covered one Financial Independence backup plan – our spending.  We’ll dive into investments, cash buffers, extra income and other things in Part Two.

I’ll also share how we’ll plug that $6,000 cashflow gap (and larger), in case you’re still wondering about that!  Stay tuned and thanks for reading!

36 Comments

36 Replies to “Financial Independence Backup Plans – Part One”

  1. As I mentioned over on AussieHIFIRE, I’m in the “I’d like to have more wiggle room” camp.

    Having said that, I don’t think anyone really believes they absolutely CAN NOT reduce their spending when they use the term “fixed costs”. Anyone who has achieved FI knows how to control their costs at least to some degree and will very likely find a way to reduce costs if they need to.

    However, it is a simple fact that the leaner the budget is to begin with the harder it will be to cut spending. You’ve shown here how it can be done but for most people I don’t think it will actually be as easy and, more importantly, comfortable as you make out. For example you mentioned in a previous post (or perhaps comment) that your partner already thinks your budget is pretty frugal and on the lower end of spending. No disrespect intended but would she think your budget is still “comfortable” if it had to be reduced by 40%? Just something to consider is all.

    Wants versus needs is definitely a good point. So is realising we have it better than the majority of humanity today and all of humanity in the past. However, how far do you take it and can you truly content yourself with those thoughts when living in a rented caravan in a trailer park for example? (not you specifically, just in general) I mean, you’d still have it better than most of humanity and your need for shelter is taken care of right?

    Anyway, just some thoughts and not trying to dispute your point of view. I totally agree with your overall points. We have to be adaptable and it is important to realise that happiness and consumption are not undeniably and inextricably linked. However, I also think it important to accept your own reality and be honest with yourself about what would bring your happiness and how comfortable you would be in different circumstances.

    1. Thanks for your thoughts AA.

      While it’s true that lower spenders have less to reduce, it’s also very likely that they’re more comfortable with reducing spending than the higher spenders (or the high spenders would probably spend less already), which I think makes a huge difference.

      I asked my partner about this because it’s a good point. She says “well that’s just what we’d do.” And I asked whether she’d rather retire sooner and be more flexible or retire later and not have to be flexible, she said “retire sooner for sure”, and that’s basically what we did. But you’re right she may be less excited about it as me 😉

      It’s only really a thought exercise to show people what I’d do, since we’re both actually earning some income these days, there’s likely going to be no need to cut expenses, but definitely can be done.

      Your question on being content living in a caravan – do I think it’s possible to still live a happy life? Yes I do. Do I think our western values and ideas of success would get in the way of that? Yes of course. In fact, there’s a caravan park that’s a few suburbs away and it overlooks the beach and it’s so damn beautiful I actually thought it would be pretty enjoyable to live there!

      So the problem is that many of us measure our life based on external things and play the comparison game with each other. You can absolutely live in a caravan and still build a life that bring happiness – family and friends, meaningful work, a healthy lifestyle, helping others, enjoyable hobbies etc. I fail to see what’s missing? It’s just not our idea of success and how we ‘should’ live, that’s all – and then we’d get a complex about what people might think etc.

      1. “Well that’s just what we’d do” pretty much sums it up. I think everyone in the FIRE community who has or is close to achieving FI has, by definition, done what they’ve had to do. No doubt they will continue to do so.

        I don’t necessarily agree that someone currently spending less would be more comfortable reducing spending further that someone who is currently spending more. If would be comfortable spending even less than they are why aren’t they spending even less already? If I had to choose between cutting out a holiday or having to move house to save money I’m pretty sure I’d find it easier to do without the holiday.

        My point about a caravan park was more about the need for people to be honest with themselves. I believe anyone can be happy regardless of their material circumstances. I grew up in conditions well below the poverty line for Australia yet remember my childhood being a happy one. If living a subsistence level lifestyle in a caravan park would make someone happy they should absolutely do that. On the other hand, if they are pretending to themselves that they would be happy doing so as a way of reassuring themselves they have a good financial back up plan, I wouldn’t consider that a rational path to take. (I’m certainly not suggesting that is your situation. Just a general comment)

        1. Sure, we can each choose whatever we want to drop from our spending, or not.

          I think you misunderstand my point. It’s not that living in a caravan park would MAKE someone happy – it’s that someone can BE happy, regardless of whether they’re living in a caravan park or not. The two things are unrelated in my view. If someone thinks they can’t be happy unless they have a certain standard of lifestyle in modern day Australia, that is pretty sad and another matter entirely.

          1. Sorry, I guess I’m not expressing myself very well and I really don’t mean to come off a trying to say you are wrong or anything. I agree that anyone can BE happy living in a caravan park. There are plenty of people in the world living in worse and on less who are still happy. As I mentioned previously, I grew up in a situation well below the official poverty line in Australia and still remember my childhood as being a happy one generally. You don’t need a top 1% lifestyle to be happy. Happiness is a state of mind and I think everyone would benefit from truly understanding that they don’t need all the shiny baubles to make them happy.

            On the other hand, it is easy to deceive oneself too. Whilst living a firmly middle class lifestyle with enough money to meed all one’s needs and many of one’s wants, it is easy for someone to believe their happiness and comfort wont be affected and they will be just as blissfully fulfilled with life if their standard of living dropped by half or whatever. I think it is important to acknowledge the reality that it probably wont be as easy as many think it will be. That’s really my only point.

          2. Okay I see what you’re saying now. Thanks for the extra explanation!

            I guess there’s no way to know for sure until you actually live through it, and there may be some mental struggle involved. Appreciate your thoughtful comments by the way, no offence taken at all 🙂

  2. An interesting read. I wonder if part of the issue here is people just having different ‘bottom lines’ about the risks to their lifestyle that they are willing to accept. The degree of flexibility people are willing to entertain might just be thought of as the flip side of the investors ‘risk appetite’. It is there willingness to accept ‘consumption risk’. We tend to not really say those with low risk tolerances are not understanding the basis of the good life, and I guess personally I’d extend that some forebearance here on the other side.

    As such, I’m not sure anyone is denying the theoretical capacity to cut to the bone a households expenditure. Rather, what I hear them say is “in setting my FI number, here’s the degree of future consumption risk I’m willing to bear”. For those in established families, that might well be lower on an average couple or single.

    On your point on happiness not scaling up, that is perfectly true. From memory, though, measured life satisfaction does consistent increase with income, up to a certain point where it levels off, I believe some of the studies show $75-100k. So that dividend hit would definitely register a downward measurement.

    Looking forward to reading Part 2 and closing the $6000 gap. Bitcoin trading? 😉

    1. Thanks mate. I was just getting warmed up, there’s no way this is cutting it to the bone 😉

      But I take your point – everyone feels comfortable with a different lower level of spending – no question about it.

      Wow we’re definitely missing out on happiness then – according to those numbers, if we doubled our spending to $90k we could be twice as happy. Honestly, I think that’s compelte bunk (a bit like the standard ‘comfortable retirement income’ figures). We used to spend way more than we do now, but we’re happier today because we’re living more in line with our values. A simpler life brings greater happiness I’ve found, contrary to what most of us believe.

      I don’t know the reasons but I’d guess those figures like that are inflated for large houses and a bunch of useless consumption that brings no lasting happiness, not to mention the fact that people feel good as long as they’re ‘keeping up’ or beating their peers/neighbours – tells us nothing about a long term meaningful life, which can be measured in relationships, meaningful work etc that cost nothing.

      I’m not sure if Bitcoin will make an appearance in the backup plans lol 🙂

  3. Totally do-able. I would be a good challenge. This is without moving temporarily out of a capital city to a low cost area either in the country or the beaches of Thailand for the year or so. Kids don’t need much. They just want your attention and time.

    (I know of 2 bed apartments a street back from the beach in my area for $200-250 a week)

    1. Thanks very much FMT! Great to have someone with a family back me up on this one! 🙂

      Absolutely – they need you, more than they need anything you can give them.

  4. Keeping it 💯 as always Dave!

    I’m currently in Malaysia (post about this incoming) and my god some families here have so little compared to back home.

    But do you know what?

    They are some of the happiest people you will ever meet. Majority of my stressed out peers back in Australia who would comfortably have 100X the wealth of this entire family could learn a thing or two.

    Happiness is not bought with money, it’s free!

    1. Awesome comment mate!

      It’s amazing isn’t it?! Takes a while for most of us to click, but once we open our eyes to how little we need to be happy, it changes everything, especially those striving for financial independence!

  5. Loved reading this post.
    I know for sure that we could live on far less – back in the days when I was at home with the kids when they were little, we lived off 18K/year. It was a matter of survival. When you leave your husband with 4 kids under 5 and with $60 cash, security becomes very important.
    I kept our costs as low as they could go. We had NO luxuries for years. When things turned around for us financially when I was able to start work again, I still kept our spending low, though over time a little lifestyle creep snuck in.
    So if I did it once, I can damn well do it again!
    However, this is why you’ll be prising the deeds to The Best House in Melbourne from my cold, dead hands, recession or no recession. I’ll cut anything down except leaving my house. My family will always have a secure base to come home to, and I fought damned hard to get it.

    1. Thanks for reading and sharing your experience – awesome!

      Haha it’s okay, since you know how to drop spending so easily, you can easily keep the house. Well done by the way 🙂

  6. Great post SMA. A very important component of FI and having a flexible and adaptable mindset. I definitely relate to your approach and reasoning.

  7. Yeah, good points. The Great Depression in Australia saw 32% unemployment at it’s peak. National incomes reduced by a third. Credit tightened. Home prices fall so there might not be as much money there as you’d expect. In an economic meltdown like that, even if you’re lucky enough to be working you’ll need to tighten the belt a lot.

    1. Thanks Mateo. Unlikely we’d hit anywhere near that level – central banks around the world have shown they’ll do anything to avoid something like that happening in the modern day economy. Whether we care to admit it or not, I think the economy is actually pretty well managed by the overlords. We have more levers and data at our disposal than ever before. Not that it’ll stop anything bad happening, but that it can be managed and the negative effects much reduced – that’s my view anyway as I wrote in this piece.

  8. An interesting perspective Dave, and thanks very much for the link!
    I think we actually agree on a lot of the issues, it’s just a matter of wanting different things out of retiring early and therefore what we’re willing to cut. For me I want to have the baseline sorted pretty much no matter what. For me if there is a crash post retirement I want a 40% or 50% cut in my income to mean maybe no overseas holidays but all the bills are paid, food is on the table, we’re eating out once in a while etc. No change to our regular everyday lifestyle, no need to sell up and move house, the kids don’t have to worry about anything. You’ve obviously willing to be more flexible with a lot of this and that’s great, it means you get to retire earlier, don’t have to stress about work and you get to enjoy life a lot more (although my life is pretty good too, I’m not complaining!).
    I do think though that for at least some of these items there are limits to how far they can be cut. Rent isn’t going to cost you nothing. Food isn’t going to cost you nothing. Utilities aren’t going to cost you nothing. Sure most people spend way more on this than they need to, but there are limits to how far spending can be cut.
    Similarly with kids. I included some stuff like swimming lessons and Kinder fees in my spending. And yeah, the swimming lessons aren’t technically necessary, I could probably teach them myself. I don’t actually know what the rules are on attending Kinder are, it may be compulsory, it may not, it probably depends on what age group they are in. But at some point they will be heading off to school and even with the public system there are still costs like school uniform, textbooks and similar stuff that you do have to fork over cold hard cash for. Likewise they need feeding, need medicine from time to time, need new clothes and shoes. Those are all extra costs that have to be taken into account and budgeted for.
    So if you’re going for HIFIRE or maybe even regular FIRE in the event of a crash then you can cut back on a bunch of stuff and you’re probably going to get through life just fine because there is a decent size safety net in place, if you can’t do an overseas holiday every year then too bad so sad. But if you’re going for lean FIRE, then that safety net is a lot smaller. Chances are if you own a home then it’s already a pretty cheap one and there isn’t much at all to be gained from downsizing because between your selling costs and your buying costs you aren’t gaining anything or it’s actually costing you money. If you’re selling and the plan is to rent thereafter, well that’s a decent chunk of money you have to come up with for a long time. And if you’re into lean FIRE and already renting, well chances are that you’re already renting a pretty cheap place and there isn’t much cheaper available out there.
    That’s not to say that there are zero savings available, of course there are some. But what would be a super easy barely an inconvenience to those on HIFIRE might mean drastic changes in lifestyle to those on lean FIRE.
    Having said all that, I think we can both 100% agree that the average Australian household has plenty of room to cut spending if they want or need to. Unfortunately despite most people saying that they want to spend less and save more, revealed preference shows that they’re not actually willing to do this, which is why FIRE is currently a niche rather than mainstream.

    1. Cheers AHF 🙂

      Definitely limits to these things, but as mentioned those limits are more self-imposed than we care to admit!

      I did cover a few of those things in the article, or were you referring to lean FIRE as being $30k income or something like that? I’m not sure of the definition? For those people, the 40% cut would only be $12k drop, which is pretty easy to come up with small amounts of saving, and other stuff I’ll get to in the next post.

      Also those on lean FIRE are much more comfortable with lower expenses so they’re probably more willing to find optimisations than high spenders in my opinion. There’s always a way, if they don’t want to work at all.

      Yep we can totally agree that the average household is more or less celebrating the burning of a pile full of cash in their living room every week as they dance around joyously and party alllll the way until Monday morning 😉

      1. Oh absolutely, the limits for most of these things are a fair way from where most of us currently are.

        I think it’s hard to come up with a definitive dollar figure for lean FIRE in no small part because of variables like whether you own your own house or are renting, and whether you have a partner and kids or not.

        To me lean FIRE is probably more about just not having much room to cut costs and living on a pretty tight budget even if everything goes according to plan, so no holidays, a pretty quiet life. Regular FIRE is about having a bit more luxury with the occasional holiday etc, and HIFIRE, well that’s me! 😉

        So to my way of thinking if you already don’t have much room to cut costs because you’re already on a tight budget, then one or two bumps in the road and you might be in real trouble. As you say if you’re really desperate you’ll probably find a way, but in that case maybe you would have been better off working a bit longer and having more of a safety net?

        And yep, parties are fun. The hangovers, not so much.

        1. Oh ok – yeah that makes sense – I wasn’t sure if there’s a dollar figure for it or not.

          I think low income FIRE is still perfectly safe because there’s obviously more we can do than cut spending, which I’ll get to in the next post (don’t want to give it all away!) 🙂

  9. Great post Dave and I personally think you are still being rather kind and conservative with the budget cutting to soften the blow for the wider audience. Maybe you could do a more extreme version and then people would see how reasonable your suggestions are in comparison.

    You could go tiny home, caravan, house sharing or geoabitrage routes and easily cut the budget in half again or even completely eliminate if really aggressive. It is easy for people to jump to the conclusion that this is all sacrifices but they might be surprised in finding that it can bring life experiences money can’t buy (pun intended). Social aspects of house sharing, living in a caravan community, culture of another country, closeness and bonding of a tiny home!

    Some might find they can’t go back to the loneliness of their 4 bedroom home or miss the connection they had from being closer to each other etc. If they don’t get any of these added benefits then it is just temporary anyway and will appreciate what they have more when everything recovers again. Maybe it is just because I grew up in a 2 bedroom house with 8 people and slept on the couch for much of my childhood that makes this seem easier.

    For the many people who plan to retire with a paid off house can look to sell and invest in the down market. Sure your house might have lost value but it will be significantly less than the markets loss. In the recovery you might even find you went from regular fire to fat fire in the process! It’s never all doom and gloom.

    1. Haha Adam, great comment!

      I’m glad someone noticed my generosity! Yes I think it was pretty conservative too, just to keep it relatable 🙂

      You make some wonderful points, and I appreciate you sharing your experience.

      There’s definitely no end of excuses as to why this doesn’t work for the individual, which is fine, but we should be honest with ourselves that it’s entirely possible and unless our values are all fucked up, there’s no reason it should result in the misery some people imply.

      It almost comes back to people’s fear of change or anxiety over having to ‘miss out’ or ‘sacrifice’ something. Maybe we’re just a couple of weird and unreasonably frugal optimists?

  10. Great article SMA, as always.

    The more I think about FIRE and its dualities of lean and hi, the more I favour the latter. The predominant reasons being: 1) there’s more fat to trim if poop meets fan, 2) I think about $$ now so I don’t have to later, and 3) I’m cutting things pretty lean to reach FIRE and when I do, I want to do things and try things I’ve chosen not to do now.

    I have kids too, so delaying gratification till they’re at an age where they (and we) can fully enjoy and appreciate it makes complete sense to me. I’m aware this sounds dangerously like lifestyle creep, but that’s the pathway we’re choosing for our family knowing full well we can hit the brakes at any time through necessity if we need to because we’ve lived frugally already.

    My extended family contains some members who have been frugal their entire lives… and they’re having a great time now taking trips overseas and flying around the country to travel and visit grand kids in their old age, spending now what they saved back in the day.

    Whatever the preferred FIRE lifestyle, the key will be to have no regrets. That’s the ultimate goal for us anyway.

    1. Appreciate you sharing your thoughts and approach Chris!

      I didn’t even know people spoke of FI in different categories until relatively recently 🙂

      All I knew was that the more you want to spend the longer it’s going to take to get there. Everyone has different lifestyle desires for sure, and if they’re willing to work longer to have a few extra perks, that’s totally fine with me – it’s up to each of us to decide.

      I guess I just think in terms of opportunity cost (the freedom foregone) and the likelihood that many people (especially the younger ones) will go on to earn income in retirement, meaning the big investment account they’ve built up will be much less necessary. Great comment, thanks for reading mate!

      1. I never really knew or thought about FI in different categories either till relatively recently. I always thought there was only one true way, but I’ve realised that won’t necessarily suit my family and I don’t want there to be a constant battle. My wife views early retirement as laziness, so HIFIRE probably suits better for that reason alone. When I can clearly show we’ll be fine no matter what — and yes, it’ll definitely take longer than lean FIRE will — then I’ll have a persuasive argument. So it’s the path of least resistance, albeit a longer one.

        1. It’s a shame some people still think of it as retiring to do nothing all day.

          Surely you’ve talked to her about living a self directed life and working on new things, whether paid or hobby related? And how it offers a unique amount of flexibility and lifestyle balance where anything that’s important to you can be dialled up or down on a whim?

          It’s not about scraping every cent so we can leave work and watch TV all day – yet to see an example of anyone in the FI community doing that lol! Most of us end up working just as hard as before on new things that bring greater satisfaction than our old jobs did 🙂

  11. Yeah mate, agree with your first sentence there. My main reason for pursuing FIRE is spending more time with my kids (one of whom was born with a life-limiting illness and will be lucky to outlive me), but we’ve got him in school now so it sort of leaves a big chunk of the middle of the day with sweet effay to do. I would find something, as you say, but the missus isn’t convinced. She’s worried I’ll watch telly all day, probably. I think she’d support me going part time but not full ER. I have no idea what I’d get up to during the day, but it would need to be something otherwise I’d probably easily be led astray. So I probably need to come up with a compelling argument first… still working on it though!

    1. Sorry to hear that mate. Maybe think of some productive or active hobbies you can spend more time doing, or simply explore different part time/flexible employment options in different industries and roles that you find interesting. Certainly no shortage of things to do!

      But I do think having some plans and ideas in place is a good idea. Without some structure and direction, it’s easy to be lazy and then we can end up with less enjoyment, rather than more. All the best with it Chris, look forward to hearing more 🙂

  12. It does seem that luxuries of the past have become current necessities. I relate it back to cars. At uni 17 years ago I have a Suzuki Swift. It broke down, didn’t have air-con, no windows, a cassette player etc. Now our household has a Toyota Corolla and a Hyundai i30. Compared to my uni car it is pure luxury! I think it is about slowing your lifestyle creep on things that don’t really matter to you.

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