Interesting to see what ideas people come up with to make their lives better. One of the most curious – so I thought so far – is that of the Frugans. They only eat the fruits that nature naturally produces, so they lie under a tree and wait for the apples to fall. In autumn at harvest time, I imagine it to be quite profitable, a bit like in the land of milk and honey. But don’t Frugans live a bit barren between early winter and early autumn?
All the more exciting that such flowers are now also springing up in the financial sector: the new trend is called frugalism. Frugalists wait until their accounts yield such abundant fruits that they can live on it – only from the income, without any work. Until then, they are living very frugally and feeding their account with every available euro. Retirement at 40 is her goal. That also sounds like a land of milk and honey. But is that it?
Leading frugalists explain how it works like this: You don’t need a large salary to have taken care of at 40, normal income is enough. Everyone can save a lot of money if they limit their expenses to the bare minimum. So: smaller apartment, abolish the car, go out less, go on holiday in the region, cook for yourself – 1500 euros are easily enough to live on, they say. The average household could save 1200 euros every month. The assets grow rapidly to around 350,000 euros if you put this rate in a fund savings plan for 15 years. You can then pay yourself a perpetual annuity of 1676 euros from this if the money remains in the fund deposit.
Sounds great, but only from a distance. On closer inspection, frugalists live in pairs on 40 square meters, have no cell phones and spend 100 euros a month on groceries. That works if you like rice, pasta and oatmeal and love extreme partnership, but shy away from other social contacts. Perhaps that is why so many frugalists write blogs. It has not yet been researched whether such bargain hunters will even reach retirement age or whether they will suffer from physical and mental malnutrition beforehand – the frugal faction is too young for that.
When they take early retirement at 40, they continue to live just as spartan as before – from 1670 euros. Great view, right? And would everyone live so frugally until the model quickly bites their way down their tail – because how can income from equity funds bubble for decades when nobody is consuming and the economy is no longer growing?
Nevertheless, you can learn something from the idea. If we all lived a little more frugally and started early, we might reap greater rewards later. Anyone who begins to put 300 euros a month in the fund custody account at around the age of 25 will have so much accumulated after 33 years that they can pay out an extra pension of 2091 euros until they are 90. At 450 euros per month, you get the same amount after 27 years and after 33 years even a lifelong supplementary pension of 2950 euros. Then there is the statutory pension because, unlike the Frugals, you didn’t stop working at 40.
How does that sound Almost to the land of milk and honey, right?
Nadine Oberhuber is Personal-Financial.com correspondent in Munich. In her column she writes every month about the joy and burden of investing and retirement provision.