You cannot shrink your way to FI

'Utils' is how an economist defines satisfaction. Quantity can be anything that you have or want (money, time, no. of vacations you take etc.).

‘Utils’ is how an economist defines satisfaction. Quantity can be anything that you have or want (money, time, number of vacations you take etc.).

In the pursuit of financial independence (FI), you will have to deal with frugality. Frugality, like many things in life, is relative.   I always find it curious to read how someone can live under $10,000 a year or under $15,000 a year with family (in a developed country.  This qualifier is important because these figures are a comfortable middle class income in many developing countries).   I read such articles more to understand the full extent of human ability to shrink their expense footprint beyond what many consider as feasible.   

The skills displayed by some proponents of ‘extreme early retirement’ are so impressive that I often come away wondering if only these people had applied such skills in their corporate jobs, how much money would they be earning?  Most companies would love to have such cost-conscious employees on their payroll coming up with ways to save money for the company.   Instead, I guess they prefer extreme shrinking (of expenses) rather than meaningful expansion (of income). 

To be clear, I also believe in frugal living, but my concept of frugality is based on the ‘middle road’ and not giving up daily conveniences that make life comfortable.   Any full-time job you do, no matter how stressful, can be organized better to generate some valuable personal time.  Once you ‘earn’ that personal time, spend it in the most rejuvenating manner possible.   It’s the quality of that time, and not quantity, which ultimately determines how eagerly you look forward to the next working day.    In many jobs, it often makes sense to work on your time management skills rather than ditching the job entirely.

On the other hand, if you buy into the narrative that your job is a ‘cubicle prison’, you have no choice but to develop an alternate narrative to justify spending the rest of your days coming up with creative ways to cut your living expenses to the extreme so that your available nest egg can support you.   The alternative narrative could be that I find it more enjoyable to look for creative ways to save money so I can shrink my budget even further rather than earn money in a cubicle farm.   At some point though, the idea of continually looking for ways to save money in every endeavor of your life gets tiring.  That is the concept of marginal utility, perhaps the most useful contribution by economics to modern life.  Utility means ‘satisfaction’ in the context of real life.   It simply means that your additional satisfaction from getting a dollar depends on how many dollars you already have.   It is easily understood in terms of money, but it applies to any item of value, including time.   A new job offering you $10,000 more will cause a different reaction if you were making $50K/year than if you were already making $100K/year.   Similarly, you will treasure 30 minutes of leisure time in a day if you hardly had any free time to begin with.  However, if you were already having several hours of free time daily, the same extra 30 minutes will make little difference.   In other words, the marginal satisfaction of having something declines once you already have enough of it.  

Another powerful principle that we all are familiar with is the Pareto’s rule, commonly known as the 80/20 rule.   The point is that in most areas of life, you can get 80% of the benefits by putting 20% of the effort.   But in order to realize the full 100% of the benefits (in other words, realize the remaining 20% of the benefits), you will need to put much more effort (80% of the effort for the marginal 20% benefits).   Another version of this rule applies in investing, as Warren Buffett says it best “it is better to be approximately right than precisely wrong”.   In other words, don’t look for precision where the effort required to be precise doesn’t justify the rewards when it is wise to be just approximately right on the value of an investment (with a sufficient margin of safety).  

Apply these concepts to frugal living and you will understand the essence of this post.   It is essential to be cost-efficient in the high impact areas of your life – house, car, investments, insurance and health care.  If you get these right, more than 80% of your battle to reach FI is already won!  To progress further in expense control, you will start cutting the smaller items, including affordable daily comforts like the refreshing Latte.  This kind of frugality – if you do the marginal utility analysis – will cost more in life satisfaction than what you gain in money saved; in other words, a bad bargain.   Apply the 80-20 rule and marginal utility concepts in your daily life –  you will find that you are able to easily cut through the crap in many areas of life.

Remember, you cannot shrink your way to FI.   Travel safely, my 10! friends.

Like it? Share it!

13 comments on “You cannot shrink your way to FI”

  1. By EC Aunt

    Hi Mr 10!,
    Just discovered your blog today and can not stop reading all your thoughtful posts. I resonate a lot with this post. Love the 80/20 rule with the marginal benefit theory!
    When we are reviewing the past year and planning for the new year, the biggest FI challenge we foresee is not related to spending as we are frugal people by habits. The biggest concern is to stay in my current job and not just quit because of the high stress level. My goal is to look within the company and find a different role that will be better fit for me.
    Thank you again for generating such awesome content. As someone who is still early in their career (5 years in, or maybe not if we can hit our goal to reach FI in the next 5 years :P), I find it helpful to read through the advices from someone who has walked through the path successfully. I see this blog as my virtual mentor now!

    • By TFR

      Thanks for the kind words EC Aunt, much appreciated. I saw your blog as well. You and uncle are on a great life track together and will likely reach FIRE 🔥 in your mid 30’s if you continue on this journey. I am honored to be your ‘virtual’ mentor.

  2. By Xyz from Our Financial Path.

    I try to focus on exactly that, less effort for biggest savings.

    I switched insurance in 30 minutes and saved $300 a year
    I shopped around for the best neighbourhood and saved $50,000.
    I keep my 9-year-old car and save a bunch more there!

    The Lattes won’t change much in the big scheme of things, we did cut on restaurants but still go out and live a little 🙂

  3. By Mrs Hill

    This really resonates with me. You wrote all the interesting points which catch my eye from all the FI Blogs that I read in one. It all boils down to finding what’s important to focus on so one can cut the distracting clutter out.
    For me, all decisions revolve on what will best meet my priorities.
    My priorities are simple.
    They call me, “Mama.”

  4. By DoubleNickels

    Your point is one well taken. I work in a high 5 figure job that will likely drift above 6 figures soon. But I’m also 55. And I’m far from FI at this point. HOWEVER, I think what I like about the early retirement extreme and extremely frugal writers is that living frugally saves you money twice. One, now: “I make 50,000, but live on 25k, so I can save 25k per year for FI.” But the second and more important is the future: “I know I can live on 25k, so my need for FI is only 625k. Whereas if I lived on 40k (non-extreme), I would need 1million. So, to give yourself the extra cushion (80% vs 100%), you’ve not just added 20% to the number of years you have to work, but you’ve raised it in a exponential fashion.

    Excuse my crude math, but here it is in numbers:
    625 / 25 = 25 years to make FI (assuming no growth)
    1m/ 10k (savings) = 100 years to make FI (assuming no growth)
    This shows the really extreme view, but I think you’ll get my point.

    To your point….if you work to increase your income every year, AND assuming you can save all of the increase, that 100 year timeframe could be shortened greatly. HOWEVER, eventually, you will be saving 50% or more of your income, and by that definition, you will be EXTREMELY frugal.

    That’s why I think they are right on. Do both. Be frugal. Make more money (and save it!). Just don’t let the modern western idea of continuing to grow your expenses as your income grows (or doesn’t).

    • By Ten Factorial Rocks

      DoubleNickels, You are right but the point of this article is different. There is a limit to frugality below which it is frustrating but there is no limit to income expansion. Frguality is also relative to each person. The leveraged impact of even slight increase in income on savings and compounding benefits is huge. Thanks for commenting.

      • By TJ

        Saw your comment referencing this post on AA, And I just don’t agree with this idea that you can’t shrink you way to FI. For one, geographic arbitrage is substantial if you’re willing and able to do it, which I mentioned in my post on lifestyle deflation a few months ago.

        I also don’t agree with you that there is no limit to income expansion.

        You mostly have unlimited ATTEMPTS at growing your income but there’s no guarantee of actually seeing realization in income growth. That’s the biggest reason I don’t pursue a master’s degree. The use of that capital is better used elsewhere and going into debt doesn’t seem work. Maybe it increases my income, but maybe it doesn’t. Maybe I just have a pile of debt or a much smaller nest egg.

        Cutting expenses is a lot easier for FIRE folk because it’s a more easily controlled and quantifiable variable.

        And to DoubleNickels point, if you cut your expenses enough, it drastically shaves years off the number of years required to work. Ignoring costs is how so many celebrities and athletes end up bankrupt after their short lived career is over.

        And yes, cutting costs for a company sounds like an amazing job for this person who seems to focus more on reducing costs than growing income. I LOVE working in purchasing because I get paid to save the company money! It’s a dream job! We’re just too small for me to actually have 40 hours of work so I get bored.

        Pay me to be frugal at the corporate level? It would speed up my time to FI drastically if they paid me enough. On the other hand, I always assumed that the big corporations have better negotiating power, so I’m not sure how effective my strategies would be, but at small businesses, it’s shocking how some buyers just don’t shop around. Why? Probably because almost any small business owner is going to allocate more funding to the sales division than to the purchasing division. It’s counter-intuitive to focus on cutting costs in a business, but I’ve seen it work.

        Of course, for me personally, my concern would be that working for a corporate monster would result in having more difficulty with work/life balance.

        • By TFR

          Thanks for your detailed comment TJ. Your comment doesn’t change the facts or the principal message of this article. There are limits to geographic arbitrage and the limits aren’t always financial – it boils down to the ability of people to put up with compromises that come with it. See here:

          If you are flexible and adaptable, yes it can save you money but that’s a conscious compromise that not everyone can make. As an expat for years in Asia, I learned this first hand. I agree there is a finite limit to income expansion. But even a 25% increase, while keeping expenses constant, will have a leveraged effect on your savings and FIRE. This is covered here:

          That’s why I agree entirely with Paula not to sweat the small stuff. I believe in sensible frugality:

        • By EC Aunt

          I think my fav part of the post is the 80/20 rule. I always like to see what my return in investment is regarding to “my effort” (not just money). If we are already achieving 80% of frugality with relatively low effort, I think then we can focus our effort on something else (expanding income), rather than chasing the rest 20% of frugality and pushing to the absolute limit of as the marginal benefit would be low.

          • By TFR

            Thanks for commenting EC Aunt. I try to live the 80/20 rule in almost every area of my life. I am an optimist always looking for optimization! I find extreme frugality to be sub-optimal. Glad this resonated with you.

  5. By ZJ Thorne

    This is so true. Shrinking into every version of frugality sounds brutal for folks who are uninterested in it. I like my coffee and delicious food whose dishes I don’t have to clean. I’m focusing my “extra” time to learning skills to maximize my earnings so that I can keep enjoying those things.

Comments are closed.