Saving until the doctor comes: How well does the frugal lifestyle work?

Retirement at 40 is the goal of many frugalists, who give up a lot to achieve it. But can everyone really live frugally? Or is the concept ultimately only for high earners?

For a long time, status and salary were considered the main motivations for young people to drive to the office every morning. This has now changed: very few employees under 30 want to work 40 hours a week, flexible working hours and home office have now become the norm for many. The change could be called quality of life instead of bonuses. Frugalism as an alternative lifestyle fits in with this. But its origins actually lie far in the past.

What does frugal mean?

Translated from Latin, “frugal” means “modest” or “thrifty” and describes a lifestyle that aims at financial independence. The goal of most frugalists is to retire earlier than usual and then live only from their own savings or the returns from an investment. This is supposed to work by leading a fairly spartan life without consumer purchases and focusing on the bare necessities. Some frugalists set savings rates of 70, 80 or even 90% of their net salary – depending on how great the desire for financial freedom is and how much start-up capital already exists. For comparison: The average savings rate of a German was 16.2% in 2020.

According to information from research institutes, the frugal lifestyle is said to have become established primarily during the financial crisis, during which many people had to budget more carefully. However, efforts towards minimalism, renunciation and financial freedom existed earlier. In the early 1990s, the so-called FIRE movement spread in the USA, which stands for “Financial Independence, Retire Early”. The founders of the movement are, for example, the author Vicki Robin and the financial analyst Joe Dominguez, who outlined the idea in their book “Your Money Your Life”. The Canadian Peter Adeney, better known as “Mr. Money-Mustache”, also achieved worldwide fame. Since 2011, the former software developer has been explaining on his blog how he managed to retire at 30.

Extreme savers and part-time connoisseurs: the different forms of frugalism

Financial freedom is therefore the common goal of frugalists. And yet the term “financially free” can be interpreted in different ways, which in turn influences the degree of frugality.

While many people aim to retire at age 40, others are happy to stop working in their mid-50s. Still others don’t want to stop working completely, but instead aim for a part-time job or self-employment. Or they simply want to have the good feeling of being able to work but not having to. 

Not just for people who hate their job

One of these people is Sebastian Voss, who gives insights into his frugal life on his blog “Frugal zum Glück”. The 26-year-old knows that he wants to be financially free at some point. He just can’t answer the “when” yet, because he loves his job as a teacher and doesn’t want to stop working anytime soon. Sebastian does treat himself to things now and then, but he still puts €900 to €1,100 of his salary aside every month and invests it. In order to achieve this, Sebastian told us in the podcast that he didn’t have to change that much. In his case, it was mainly unnecessary consumer purchases that had prevented him from saving up to now and which he had learned to do without.

Oliver Noelting, 32 years old and recently a father, is already tightening his belt a little. He also records his life as a frugalist in detail on a blog and reports on the tricks he uses to spend less than €100 a month on food, how he and his girlfriend lived in a 46 square meter apartment for years and how to make your own soap.

But it can be even more extreme: some frugalists go without food altogether for a while or practice intermittent fasting to reduce their monthly costs, get rid of their smartphones and only put furniture in their homes that they have been given as gifts or picked up on the street. Environmental aspects usually go hand in hand with a frugal and therefore automatically very minimalist lifestyle: the goal of many frugalists is not only to enable themselves to live a freer life, but also to keep their own ecological footprint as small as possible.

So there is no one type of extreme saver who eats nothing but oatmeal and washes his clothes in the sink so that he can quit his job at the age of 30. Apart from that, age and salary are the main factors that determine how high the savings rate must be in order to retire earlier than usual. As a general rule, the earlier you plan to retire, the more you have to watch your money in the years leading up to it and the less luxurious your retirement will be even after you have achieved financial freedom.

How much is enough? Calculate your own needs

In the cosmos of the FIRE and frugalism movement, many people are guided by the so-called 4% rule, which goes back to a study from 1998. It stipulates that once a certain amount of savings has been reached, 4% of assets can be withdrawn each year over 30 years in order to live without new income and without running out of money. This 4% is supposed to be interest or dividends, i.e. income earned, for example, by investing in the stock market or real estate. This means that annual expenses should be fed by the return and the remaining capital in the portfolio should remain untouched.

Calculating the “Fire Number”

For the 4% rule to work, frugalists say, total assets must reach a certain level in relation to personal expenses. This so-called “fire number”, i.e. the total requirement, is calculated by multiplying annual expenses by 25. The result is the amount that supposedly has to be saved in order to be financially free for 30 years.

💡An exampleMarkus is 27 years old and wants to be financially free by the time he’s 40. He would like to have a net monthly living income of €1,500, which is €18,000 per year. Multiplied by 25, that’s €450,000, which Markus would need to earn from his investments over 13 years in order to be able to live off his assets plus earnings until he’s 70. For many, this is a pleasant idea, but probably only very few can afford it: in order to build up almost half a million in capital in such a short time, the monthly savings rate would have to be around €2,000. Taxes on capital gains are not even included here.

Is the 4% rule a naive calculation?

In many places on the Internet you can read that the 4% withdrawal should be applicable not only over 30 years, but over any period of time without financial difficulties. However, there is no guarantee of this, on the contrary: the longer the withdrawal period, the higher the chance that the concept will fail and that bankruptcy will threaten at some point in old age. This can mean having to look for part-time jobs at 60 or 70 in order to compensate for any losses and to be able to afford living expenses.

Even if the stock markets are rising continuously, that does not mean that the average return will ultimately be 4% per year. For example, anyone who invested their money in an MSCI World ETF between 1990 and 2008 was able to achieve an average annual return of just 1.3% after these 18 years. In addition, the 4% rule does not take into account taxes that have to be paid on stock profits. With ETFs, 30% of the profits are tax-free, and the rest is subject to 25% capital gains tax plus solidarity tax and possibly church tax.

Another question is whether the 4% payout is actually enough for everyone to lead a decent life. 4% of €400,000 is €16,000, but 4% of €100,000 is only €4,000. This means that in order to have a good income in early retirement, you first have to have a substantial sum. But more on that in a moment.

Financially free after 17 years with 50% savings rate

There are other rules of thumb on the Internet that sound too simple to be true. One of them goes like this:

💡Rule of thumb?Anyone who continuously saves half of their net income will be financially free after about 17 years – provided their expenses remain the same.

Is that true? Let’s do a little calculation: Lisa Müller is 25 years old and wants to be financially free in 17 years. She earns €2,000 net per month and puts 50% of that aside each month. This means that she has €1,000 left each month for rent, food and leisure. After 17 years of saving, she will have saved €204,000 and will have to live off that for the rest of her life. If she lives to be 92, she will have just €5,100 left per year, or around €425 per month. That’s less than half of what she currently has available when you deduct the savings rate.

Without shares it doesn’t work 

If Lisa were to invest the money she had saved, things would look a little different. After 17 years, with an average annual return of 5%, Lisa would have a total of €320,000. Let’s assume that Lisa does not withdraw the money in full at the age of 42, but only a monthly portion, and that the remaining capital continues to generate returns for her. If she continues to earn an average of 5% interest, she would be able to pay herself a total of €1,428 over 50 years (until she is 92). With an annual return of 3%, it would still be €1,022.This means that without the help of the capital market, it is almost impossible for people without an exorbitant monthly salary or other assets to live off their own savings for decades. If the savings are invested directly, early retirement can certainly work.

Should the state help out at 67?

Some other calculations are more optimistic, assuming that a statutory pension is paid from the age of 67. The crux of the matter is that anyone who leaves work earlier pays less into the statutory pension fund and therefore does not have the same entitlements as someone who works until the standard retirement age. The amount of the later pension is calculated based on the pension points that an employee has accumulated over their life. For every year worked in which a certain salary level was exceeded, they receive one pension point. Anyone who leaves their job 20 years earlier collects fewer pension points.

Anyone who has paid into the pension fund for 30 years and has an annual gross salary is entitled to a gross pension of around €1,600. Inflation is already factored in here. However, if you have only worked for 15 years at the same salary, your monthly gross pension is just over €1,000.

What is also often forgotten is that for most people, termination means that they have to cover their health insurance contributions on their own. In an employment relationship, the employee pays half of the costs. It is therefore better to calculate future pension entitlements directly or to calculate them directly independently of future pension entitlements.

Is frugalism only for high earners?

The promise of retirement at 50, 40 or even 30 sounds good. But is that possible even with a small salary or is frugalism ultimately only for high earners?

The operators of frugalist blogs, of which there are now a great many, deny this. On the contrary, frugalism is particularly relevant for “normal and low-income earners,” says one self-confessed frugalist in a post on the community platform “Frugalism draws on principles that everyone, from poor students to overworked chief physicians, can use to align their lives more with their own wishes and needs,” it says. And: Those who earn less can compensate for this with a higher savings rate.

Is it that simple? Blogger Oliver Noelting has been documenting his life as a frugalist online for six years now. By the time he is 40, the software developer wants to be financially free and live only from the returns on his investments. And in one of his first reports from 2016 (Noelting was 27 at the time), he explains his master plan in more detail:

The software developer saves 70% of his monthly net income every year and invests it. Noelting’s salary is not astronomically high, but at €28,200 net, it is exactly average. Of these almost €30,000, he spends just €9,600 a year, or €800 per month.

He manages to do this with very low living costs. With the 800 euros he not only pays the rent for his room in a shared flat (240 euros), but also expenses for food (110 euros), a monthly ticket (180 euros) and study and health insurance costs, which he puts at 80 euros. Noelting can therefore save and invest almost 20,000 euros per year. He relies primarily on passive products such as stock ETFs. According to his calculations, his assets will amount to a full 425,000 euros by the time he is 40 years old if he continues to save and invest as before. With this wealth and a 4% return on the invested capital, he then wants to pay himself 17,000 euros per year (4% of 425,000 euros). He has taken into account an annual salary increase of 1,275 euros, but also increasing expenses over the years. But Noelting has an advantage: he is not starting from scratch, but already has €55,000 in the bank in 2016.

The lower the salary, the more difficult it is to save

But what if there is no starting capital and the monthly salary is not €2,350 as in Noelting’s case, but much less? Let’s do a little calculation for that:

Stefan is 30 years old, works part-time because he is a single father and earns €1,300 net per month. At 50, he wants to be financially free, so he has even more time to save than Noelting. Stefan cannot afford a savings rate of 70% because that would mean having less than €400 a month to live on. He therefore invests 50% of his net income, i.e. €650 per month, in an ETF that generates an average return of 4% per year (after inflation).

At the age of 50, he will have a final capital of €223,000 adjusted for inflation, which should last for around 40 years (until he is 90). Salary increases, taxes and rising expenses are not included. Stefan also only pays out 4% of his capital each year, in his case €8,920, or €743 per month. With financial freedom, Stefan will actually have a little more to live on than he did during the savings phase. But let’s be honest: With a below-average salary, neither the savings rate nor the later “pension” are enough to live on, let alone to finance other family members.

Whether it is possible to save half of the money on a small or at least below-average income of €1,200 or less and still afford rent, food, etc. is another matter. In any case, the fact is that the starting conditions have a major impact on whether a frugal lifestyle is even feasible – and whether the years of doing without are worth it in the end.

Early retirement needs to be well planned – but is still not guaranteed

Self-discipline alone is not always enough to make the leap to financial freedom. The starting capital and monthly salary have a big influence on how practical a frugal lifestyle really is. In addition, everyone lives under different conditions, pays different amounts for rent and has their own individual expenses to cover.

In order to fulfill the dream of early retirement, you should therefore work out exactly how you want to achieve this and what savings rate you need to achieve it. If the plan is based solely on simple rules of thumb, financial freedom will be on very shaky ground. But even if the planning is as precise as possible, that does not mean that the goal will be achieved exactly as calculated. After all, life does not always run smoothly, but consists of many small and large unpredictable events. For example, family planning can throw a spanner in the works because a larger apartment is needed and monthly expenses automatically increase. Or unexpected costs for health care arise, building your own home turns out to be much more expensive than expected, you lose your home, or your income drops temporarily or permanently. Planning for such eventualities with a buffer is absolutely necessary in order to avoid getting into financial difficulties.

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