100 ideas for a better life: Frugalists give up more than half of their income for years and invest it in securities: What sounds easy actually requires tough decisions.
According to his own statements, Lars Hattwig has achieved what others dream of: the 53-year-old Berliner is no longer dependent on a job. He neither has a boss nor is he responsible for employees. He can work if he wants. But he doesn’t have to. The origin of his freedom has a name: frugalism. In German, the Latin word “frugalis” means: economical, frugal, thrifty.
It all started in the noughties. Hattwig was in his early thirties and working as a meteorologist, even leading his own team, when he felt that he didn’t want to be dependent on a fixed professional income for the rest of his life.
But the goal of a life without a boss or employer was a utopia back then. His account balance was close to zero. He immediately spent what he earned. Hattwig often worried that an unforeseen event would cause him financial hardship. A broken refrigerator or broken car would have been a disaster.
Hattwig developed a plan: He began by meticulously recording how much he spent on what. He wanted to eliminate all unnecessary expenses from his life. He stopped smoking, gave up branded clothes and also eliminated all other unnecessary expenses from his life. Hattwig wanted to invest the money he had accumulated in the hope of one day being able to live off the income from his investments.
Without realizing it, his model of life was one of the pioneers of modern frugalism.
The financial crisis as a great opportunity
In North America, systematic thrift became popular starting in 2011 under the name “Fire” (an abbreviation for: Financial Independence, Retire Early). The movement’s followers sometimes save well over half of their income and invest it in stocks, real estate and other investments. Your goal: put aside 25 times your annual expenses profitably.
Then, according to the theory, it should be possible to withdraw 4 percent from assets every year without it shrinking. Ultimately, the invested capital continues to increase in value on a long-term average. And income accrues in the form of dividends and interest.
Critics of the “Fire” movement consider these assumptions to be overly optimistic. Because they do not take transaction fees and the ever-increasing life expectancy into account. But there are many frugalists who believe that it should be possible to become financially independent well before normal retirement age. This also applies to Hattwig, who at times went beyond his personal pain threshold on his way to independence.
When share prices on the stock markets collapsed during the global financial crisis in 2008, he saw his opportunity. Most securities were valued more cheaply than they had been for a long time. He radically reduced his expenses and tried to invest every penny he earned directly in the stock market.
Financially, the trip to extreme thrift was worth it. Nevertheless, Hattwig would not repeat the phase at that time. Anyone who lives with so little money for a long period of time pays a high psychological price. “You adjust to the fact that you are poor. That’s not a good way of life.”
“An incredible feeling of happiness”
In 2015, a good decade after beginning his financial life transition, Hattwig achieved his goal. He was able to quit his job as a meteorologist. Since then, he says he has been living on passive income from his securities portfolio and his work as a self-employed stock market coach. “Sometimes I work for a few weeks straight. If I feel like it, I can just take it off. Because no matter what I do, the money comes in. The freedom to organize my time the way I want gives me an incredible feeling of happiness.”
But living as a financially independent person also has disadvantages. Anyone who lives from dividends and capital gains is exposed to the tides on the financial markets. If there are major downward movements on the stock market, as was the case during the Corona crisis at the beginning of 2020, this quickly triggers existential fears. “In the initial period after I left my job, I lacked the security of a regular salary,” says Hattwig.
Life without the solid structure of a regular job isn’t for everyone either. Most frugalists are aware that even after they have achieved their goal, they need structure to avoid falling into a psychological hole. Like Hattwig, many are self-employed in some form, often in the area of financial advice. Critics of the frugalist movement therefore say that financial independence is primarily a fashionable term for self-employment.
Hattwig hasn’t bought a Porsche yet, even though he could. The thrift from his frugalist days is still there. But he also splurges on a five-star hotel when he travels, something he wouldn’t have done when he was active.
A standing order to financial independence
Hattwig is convinced that it is good for everyone to live a frugalistic life to a certain extent. “Anyone who immediately spends all the money that comes in should question their way of life.” He sees prominent footballers who have earned millions in their careers and at some point are left with nothing because of their excessive lifestyle as bad role models. “That is the opposite of frugalism.”
You don’t have to go all out straight away. High savings rates are difficult to achieve for families with several children. But putting aside 100 or 200 francs a month is still better than simply living from hand to mouth. The best thing to do is to set up a “financial independence account” into which a fixed amount is paid monthly via a standing order. Hattwig: “Automation is central – over time you no longer notice that you are saving.”