Cheap: The High Cost of Discount Culture by Ellen Ruppel Shell covers a wide variety of topics, but the main idea I got from reading it, was that we are too focused on price, and not enough on value. We have shifted from quality, durability, and craftsmanship towards quantity at the lowest possible price. I previously wrote about how it’s harder to judge quality these days as it relates to Coach Outlet stores. Next time you buy something, think about what you actually know about who made the product, the materials or ingredients used, and how long it will last before you have to buy another one.

Thanks to globalization and a relentless pursuit of efficiency, we now have $1 chicken sandwiches, $5 toasters, and $10 IKEA coffee tables. That saves us money, right? However, also notice that it’s often the crap in our lives that gets a bit cheaper. The real essentials – rent, education, healthcare, gas, never seem to get less expensive. On top of that household wages are stagnant, partially because all the jobs making stuff have gone to the countries with cheapest labor before our workforce has had a chance to learn to do something else. Look at the current unemployment rate. So are we really coming out ahead?

The book includes an interesting history of the evolution of retailing and the creation of the discount superstore. There was a time before Wal-mart when small shops sold specialized products through educated salespeople. Now, everything is propelled by mass advertising everywhere, followed by do-it-yourself shopping. Now, I personally like reading tons of peer reviews on Amazon before buying a product, but you have to admit that the genius of a store like IKEA is that so much of the cost is shifted onto the consumer. We load up the huge boxes onto a shopping cart ourselves, cram it into our car, drive it back home (paying for the gas), and build it ourselves with hours of labor.

There is also the interweaving of behavioral economics topics you may be familiar with by academics like Daniel Kahneman and Dan Ariely. For example, you probably get excited when you buy something marked down 60% at the mall. We’re all genetically wired to get hyped up for that, so it’s not surprising. Well, these days basically everything is marked down. Only 20% of department store merchandise is actually sold at full price. If everyone is getting the same “deal”, is it still a deal or just manipulation?

On a related note, discount stores often tout “everyday low prices”, but they really just try to compete hard on things that we buy most frequently and are most familiar with. Wal-mart actually has higher than average prices on about 1/3rd of its inventory. On the items for which prices are lower, the savings is 37 cents, with about 1/3rd of items carrying a savings of no more than 2 cents. The loss leaders draw us in and make us feel like we’re saving money, but the other things we toss in our basket make the profit.

Although some of these trends are unlikely to be reversed, we should remember that it’s not all about the price tag. An example of how things “should” work is the grocery store Wegman’s, which I am not familiar with but sounds a lot like Trader Joe’s on the West Coast. Locally-sourced products, good wages and benefits for employees, and good service create an atmosphere that is not solely focused on price (although it is still an important component).

Earn more, or spend less. That’s what you have to do in achieve financially independence. My own philosophy has been to try and earn more than average, perhaps look about average to casual observers, and spend below average. Now, what if instead you earned about average, but spent way, way below average?

Various studies have shown that with a portfolio of about 60% stocks/40% bonds, you can withdraw 3-4% of your portfolio value each year (inflation-adjusted) and have a 95%+ chance that your money will last a lifetime. Using a 4% rate, that means to retire, you’ll need to save up 25 times your expenses. So if you spend $40,000 a year, you need $1,000,000. By that same math, if you only spend $8,000 a year, you only need $200,000 to retire.

Impossible, you say? Not to Jacob Lund Fisker, author of the book Early Retirement Extreme, who says he lives on about $10k a year and retired by 33. Extreme is a good word for it, though. In the US, the poverty line for a single person is $10,890; for a family of four is $22,350. But that’s how he can make the following claim about his book:

It’s possible to retire and live on invested savings after just five years of full-time work.

Five years?! No, I don’t think he’s crazy. I think it’s awesome that he presents such a different perspective, even if few others can achieve it. He observes that as humans we are more productive than ever, yet we work just as hard or harder than before. The opportunity for early retirement is definitely within grasp in this country.

So how do you manage to lower your expenses to such a level? You’ll likely need to alter your entire philosophy. Living a low-cost, self-sufficient lifestyle must be the end goal, not just a means to an end. If being financially free means driving fancy cars and eating at a new restaurant every night, this will not work for you.

Being Fisker’s ideal “Renaissance man” means going back to when people were mostly generalists (proficient at many things) instead of specialists (exceptional at one thing and outsourcing everything else). It means buying stuff that last forever (high-quality shoes), and learning to fix stuff that doesn’t (darning your own socks). It means not using air conditioning and accepting that sweating also cools you off. It means being willing to bike/run/walk 5 miles to the store instead of jumping in a car. It means living in smaller, more efficient housing that should cost no more than $200-$350 per month per person. It means not paying $100,000 for a college education, but going to a trade school or apprenticeship instead.

Going back to the 4% withdrawal rate. Let’s say your cable bill is $40 a month. That means you would need to save up $12,000 solely to pay for your ongoing cable bill. Is cable TV worth $12,000? Maybe, maybe not. Now do this for all your expenses.

Investing philosophy. Fisker does not like “Buy and Hold” or even low-cost index funds as an investment strategy. However, he does not offer up a satisfying alternative. There are some vague references about how if you devote some time to learning about investments, you’ll be able to earn much better returns. After gathering up clues from the book and his blog, I can only guess that he focuses high dividend stocks that have a very small market cap and thus avoid Wall Street analyst attention (a less efficient market). He doesn’t share actual holdings, so we are unable to follow along or track returns.

Conclusion

Jacob is a Physics PhD and this book is written like a scientific paper or textbook. The text is small, the information is densely packed in, there are lots of footnotes, and it was even written with LaTeX. Much of the same material is available from Jacob’s blog at EarlyRetirementExtreme.com. I recommend reading the archives chronologically from the beginning, especially now because there are few new articles (most are simply randomized re-posts of his old ones and it can get confusing).

In the end, I enjoyed reading this book primarily because it is so “extreme” and thus different from any other book on my nightstand. Even if you don’t adopt his philosophy entirely, it will hopefully make you question some of your current choices. I feel that we need more insight on this side of the spectrum, as opposed to all the attention on the “I sold my company to Google and made a bajillion dollars that’s how I retired early” folks.

Drive. Click. Choke. Empowered. Switch. Bounce. It seems that the short book with the one-word title is very popular these days. Here’s another one: Clutch: Why Some People Excel Under Pressure and Other Don’t, by Paul Sullivan. The book explores stories of people both overcoming and succumbing to extremely stressful situations.

The people profiled include war veterans, actors, and athletes. In particular, five key characteristics of the “clutch” are given:

• focus,
• discipline,
• adaptability,
• the ability to be fully in the present, and
• being driven, whether by fear or desire

What about a financial crisis? Your home value plummets while your mortgage rate jumps, you are suddenly unemployed, or your investments drop drastically in value. How will you respond so that your household survives? Seems a lot different than making a golf swing, but here I tried to summarize the section using the five traits above:

Focus. Take responsibility. Change what you can. Don’t waste time blaming others like the mortgage lenders or the credit card issuers that jacked up your rates.

Discipline. Cut your costs without emotion. Sell liabilities like cars, boats, vacation properties. Walk away from your home mortgage if needed. You should always have enough cash to cover twelve months of your expenses.

Adaptability. What is most important to you? Family? Well, your family will still love you if you live in an apartment and drive a $3,000 car. Learn to live without the rest.

Be in the present. Don’t wait. Don’t think you’ll be bailed out, or something magical will happen. If you rely on hope an sit around waiting for things to improve, you’ll just burn through more of your reserves and end up even worse.

Being driven. Figure out what motivates you. Maybe it is fear of losing it all, or desire for financial freedom.