Economizing lifestyle for early job departure
Experience a life of purpose by departing from the working world. This ambition drives many. Penny pinchers chase it through hyper-saving.
Save, save, save - the crucial principle of the FIRE method. The four letters symbolize Financial Independence, Retire Early. Translated, this means: Gain financial independence to quit work early. This idea originated in the US, where people call it frugality.
Those devoted to it have a lofty objective: Acquire massive savings by age 40 to support the rest of their lives without a salary. To do this, they strive to put aside as much money as possible. "Expenses are slashed to the bare minimum to achieve a high savings rate," explains financial expert Ralf Scherfling from the Consumer Center North Rhine-Westphalia.
Cut back on big-ticket items
Ultra savers eschew nonessentials. This could involve forgoing travel vacations and dining out. Impulse purchases of clothing, mobile phones, or books are also counterintuitive to the goal of reducing expenditures to nearly nothing.
This percentage is unique to each individual - frugalists chronicle savings rates of up to 70% of their monthly income on their blogs. In contrast, the average savings rate for German households is estimated at around 11% by the Federal Statistical Office.
Not everyone can save as much as select frugalists. "This is more feasible for individuals with higher incomes," says Scherfling. The reason being that those with greater incomes, after tax deductions, have more liquidity to invest in financial independence. For those on low wages, this is often impossible. Additionally, youth is favorable. With a good starting salary and more time to save, young people have an advantage over older employees.
Live off savings after quitting work
Frugalists aspire to amass wealth to an extent that they can live off the yield after leaving their job. That, for their entire life. "A standard withdrawal rate of four percent annually is often allowed," says Arthur Wilm. He is a recognized trainer for consumer education at different educational institutions.
Consistent saving isn't enough for the endeavor. The surplus funds must grow and yield - until the required capital size is reached. The milestone: 25 times the amount spent yearly.
Wilm explains with an example: Someone who needs 25,000 euros annually to live must save 625,000 euros before leaving their job. To achieve this, one would need to save around 2,000 euros per month for 20 years, assuming an average return of 4% per year. To cover their expenses for the remainder of their lives, the capital must not only remain untouched but also generate the required yield.
Anticipate the unpredictable
In Wilm's view, the frugalist calculation model contains a significant flaw. "It is thought out from a current perspective. In 20 or 25 years, it will likely fail," he asserts. Why? Inflation, for starters, and other factors like family, professional, and health changes that affect spending and savings habits.
Arguably the biggest concern is the rising life expectancy. This poses a challenge when considering how long the funds need to last: "If I don't want to rely on capital, the range will be limited." Wilm proposes that the FIRE concept only works with a sizable inheritance or asset as a foundation, as most normal earners would not likely achieve this goal without it.
Merge accumulated wealth without touching it for the foreseeable future is a struggle. "The urge to spend the money at some point is strong," says Arthur Wilm - though he questions the wisdom of frugality, he admires the discipline of devoted savers questioning every expenditure.
Wilm concludes that the approach is generally useful for consumers, helping them recognize potential savings in minor areas. What does this mean? By refraining from unnecessary purchases, like going for just one ice cream ball instead of three or not opting for a five euro daily coffee with a liverwurst roll, one can save up to 1,200 euros per year. Frugality can also entail contentment.
A fulfilling career change that aligns with frugality requires a high income to save enough for employment exit. The idea has a few unknowns and demands significant restraint. This could come at the cost of pleasure. If your job is tiresome, the model may not be the most appropriate solution. To attempt it despite risks, discipline and a plan for post-employment life are essential.
Read also:
- To achieve financial independence and retire early, some individuals invest in securities such as equity funds and ETFs, as advised by financial experts.
- The concept of saving a large portion of income to support consumption in later years is not limited to the US; it's gaining popularity in Germany as well.
- Consumer centers provide advice on financial investments, including securities, to help individuals make informed decisions about their savings and investments.
- Basic income, a proposal to provide all citizens with a guaranteed minimum income, could potentially impact the FIRE method by reducing the need for individuals to save aggressively for early retirement.
- Financial advisors may suggest a mix of assets, including consumer goods and real estate, to diversify investment portfolios and mitigate risks associated with relying solely on securities.
- As consumers age and retirement approaches, they may consider converting some of their savings into pension products to ensure a steady income stream during their retirement years.
