Greetings once again, another 7 (actually 14) days have passed and in that time I realise I have done you a great disservice with the two part mini-series because I never mentioned possibly the most critical factor when planning your retirement/exit/sabbatical; costs. So, this episode is the third in the two part mini series and will focus on understanding how much it actually costs to live your life, and how to think about that when it comes to asset management, tax efficiency, and all that good stuff. This episode is for those of you who are serious about early retirement, and exactly how to know that you have what those in the game call 'f**k you' money. Lets get into it.
Housing costs represent the largest regular outgoing cost for most people (who don't already own their homes). That said, (monthly) housing costs vary dramatically, with studio flats in Belgravia costing easily more than £3,100/month, but for the exact same flat in Batumi costing £260/month - these aren't theoretical numbers either, these are quotes I've personally received. In developed markets the base cost of the building itself and all the materials and labour needed to construct a house/apartment are almost irrelevant to the rental price, but for less developed markets and rural areas you may find yourself paying over the course of a year more than it would cost to build, but more on that in future episodes 👀.
The main question for housing is what capabilities it unlocks for you. Of course, paying over £37,000 per year to live somewhere brings convenience, prestige, and opportunity in every way. For paying a premium you can expect that getting home after an evening social is trivial, you spend much less time commuting (if you work near Belgravia in this example), you can visit internationally recognised historical monuments, museums, art galleries, and other culturally important places just by walking for 10 minutes. But, your retirement projections will take a massive hit. You may set yourself back by several years - literally - if you choose this path.
Then again, if you were really committed to retiring as early as humanly possible you would have already isolated your core needs and housing would be much more... flexible. You don't need a front door, a balcony, or any other silly things that normal people enjoy, you need a secure place to sleep, prepare food, and store and wash clothes - any hostel will do, in fact I've seen hammocks strung between fence posts under tin roofs in Vietnam which will do, anything else is borgeoise opulence corrupting your pilgrimage towards the pensioner life.
But for anyone who would like at least some creature comforts, a double/king bed perhaps, a bath and a shower, and somewhere to cook/dine with more ambience than a squared off patch of concrete, it's okay to spend a little. And by little here, I mean whatever the rough average in the area you're living is, and by average I specifically mean median (central value) if you can get that data. I personally worked in London, in Victoria specifically which is one of the most expensive housing markets in the country. For accommodation however, I lived in Crawley, which for those of you who aren't familiar with the social geography of the UK would be like going to a fancy restaurant in Paris and ordering peperroni pizza. As someone who has done both, but motivated by the quest for early retirement, this was a really solid move. Instead of paying north of £3,000/month in rent, I instead paid £1,250 (plus £400/month transport costs). This difference went towards paying down my student loan and then towards the ISA and then towards the trading account, which is what's driving my lifestyle now.
I hear some of you seething at the thought of getting a city job and not living in the city, I get it, I lived in Canary Wharf for 6 months, and near East India for a year too. You may be the type of person who wants to be socially 'logged in', and therefore the dollar value on your convenience is much higher than mine. If that sounds like you then by all means knock yourself out on housing, but also consider your financial world from a birds eye view. There are no 'pots' and there is no expectation of different expenses outside of your own mind, there is only performance.
Okay on to the next pillar of expenses; food. As you probably know I have the culinary aspirations of a bronze age peasant. That said, I do like some fancy food (Burger and Lobster in London is one example). So when it comes to considering expenses I instead think of a number which I'd be comfortable spending per day, multiply it out to make sure it's not absurd at the annual level, and then just live by that as a rough and rolling average. For example, lets say I'd like to spend £20/day on food (and yes some of you may spend that on a single ice cube or on a weekly shop), but bare with me. Multipied out that's £140/week, around £600/month, and roughly £3600/year. That sounds about right but you may want to go higher or lower depending on your salary, and how much you value quality ingredients, takeaways, cured meats, vodka, etc. Okay alcohol could be in the 'fun stuff' group for expenses but it illustrates the basic idea.
You may have done this exercise and found that on average weekends are much more or less expensive, or weekday lunches are more expensive than dinners, or something like that. The question then is if you can, and if you want to, if there is anything you'd like to change about your lifestyle from the food perspective which could add a few hundred pounds to your investment accounts each year? If so, great! Go ahead. If not, no problem, but as with the housing it's crucial to understand that it's the sum of the choices you make now which ultimately contribute to how long you spend at your day job, versus how long you spend free of zoom meetings and Jira tickets. Housing is obviously disproportionately impactful, but it's still good to be consistent.
The next pillar I wanted to mention is travel, although you could broaden this to 'fun stuff' if you wanted. This is all about how you spend your time outside of work, and boils down to the philosophical level of what you find interesting and what experiences you'll want to look back on as you sip your mango daquiri on the beach. For example, I've never really been a fan of short international holidays (0-14 days), so over my entire career so far I've only ever taken two (Greece and Tortola btw). This is not solely for financial reasons either, I don't particularly enjoy flying, it's not long enough to get a proper read on an area/country/culture, and so on, but that's just me. Similarly, I don't place a particularly high value on luxury experiences. For example, I'd rather spend a day walking around town shouting at pigeons, playing video games, watching films, and that kind of thing, than getting dressed up and going to a high end restaurant. Maybe one of those things isn't real but just checking you're still here. That's not to say high end restaurants are bad, or that I think any particular way about their patrons, just that I personally don't feel the value in the same way that a real foodie or passionate chef might, which is okay!
After everything above, we can start to see a theme forming. This really isn't about money, this is about philosophy and about one's approach to life, value, and ultimately what their approach to fulfillment and joy are. If you need to go to St Tropez three times per year, dine at the best restaurants, and live in the most luxurious places, then by all means allocate as much of your incoming assets to that need as possible, it sounds expensive. If however you're happy as a humble programming hobbit, spending weekends learning, writing, scrolling, then just do it. There are no rules here, and everyone is living their life for the first time, so just make the best decisions you can whenever you can and things will be fine in the end. I could drift here towards motivational writing and talk about being true to yourself rather than bending your dreams into the shape that is expected by those around you, but I'll leave that for another time.
The last pillar I wanted to mention in this stool/table of expenses philosophy is your time. Time is something you can never get back, and something you'll always want more of once you find something exciting and engaging to do. Even if you haven't found anything yet, most people fear the inevitable long night which will unfortunately take us all, so the more time you have the further away that moment is. One interesting thing about time especially for anyone isn't retired is that you can buy it back. You can save diligently, spend frugally, understand the real market value of goods and services you buy, and more to save more money. You can then use this money to say 'f**k you' to your boss, submit your resignation, and then commit 100% to what you're passionate and interested in, which I think is a worthwhile pursuit.
I said at the start that this would be about knowing you have 'f**k you' money, and this is a really contentious topic in the personal finance community. I personally look at things in a rolling 12 month window; can I quit and afford to do absolutely nothing for the next 12 months? If the answer is yes, then I would borrow a term I love as 'ramen retired', that is, you can probably retire fully if you did nothing but eat ramen (noodles) in a low cost of living country. You might find that when you're cutting things this fine your 12 month plans change depending on what's happening in the market (global index) which is also okay. But to answer the question, this is what I consider 'f**k you' money, any more or any market growth taking you up and away from your noodle based destiny is just a welcome bonus.
There is probably at least one person reading this that's thinking 'this is entire episode is just pure drivel, I love my job and will do it forever'. To you I say; congratulations, you have found something that very very few people find. If most people are like me (and that's a big if), then most people are lying to themselves about what they actually enjoy. I enjoy solving meaningful problems, I enjoy discussing financial topics, I enjoy navigating political (at the personal level) spaces and organisations, and I enjoy being around intelligent and driven people. There are very few jobs like that, and the best I've found were maybe a 60% hit on average across those things. Now 60% is definitely enough to at least reasonably enjoy every day, but it's not enough (for me) to do it when I no longer have to. Which moves the goal from 'do this while I live my real life on weekends' to 'do this only for as long as I absolutely have to'.
So I guess the moral of this story is to ask yourself what you actually enjoy. As the number of days you have left to live decrease at a rate of 1 per 24 hours, what are you doing? Are you going to stay in that job because the pay is good and it's not that hard? Are you going to 'quiet quit' and work 2 hours per day whilst waiting to get fired? Or are you going to think about what things are really costing you your life, and perhaps open up an ISA and treat yourself to a bit of a contribution before the end of this tax year?
It's completely up to you, as I said in a previous episode I'm just a homeless guy with a laptop (living on a bit more than noodles) so take these episodes with a bucket of salt, but there's a slim chance that this three part two-part series has resonated with you and if it has then I'm very glad. I also want to mention that the ideas in this episode apply at any age. Sure if you're a 9 year old reading this you now have a generational advantage (and should tell your parents to stop sending you random newsletters), but if you're 70 reading this you can still capitalise on the next 30-50 years of life with a solid saving, investment, and expense strategy. If you don't believe me, look at how much Charlie Munger made in the last 20 years of his life.
Anyway that's all for this and I think the end of the three part two-part mini series. I hope it was useful, and if you know anyone that might enjoy it please send it their way. See you next time.
Thanks and all the best,
Oliver
Previous Episode: Goodbye Batumi