Simple Living Through Capital

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There are a lot of ways to live simply. Frugality is one. Self-sufficiency is another. My personal favorite is living simply through capital.

The modern roots of "simple living through capital" run straight back to the classic of simple living, Your Money or Your Life. (See also: Book Review: Your Money or Your Life, one of my first posts here at Wise Bread.)

There's a lot in that book, but here's one key idea — you can achieve financial independence by investing money so as to produce an income stream that matches your expense stream.

It's a powerful idea, but it has a couple of downsides.

One disadvantage of simple living through capital is that it takes so much capital, especially now that interest rates (and investment returns in general) are so low. It can easily take a lifetime to accumulate that much capital. In fact, standard retirement planning advice no longer calls for accumulating that much capital — the assumption is that you can spend down your capital, as long as you spend it down gradually enough that you'll die before it's all gone.

The more fundamental disadvantage is that the whole vision of financial independence through a large capital-based income stream is really a false goal. Your real goal is live your life according to your values.

A life worth living is almost surely going to involve some sort of work, even if it's not highly paid work. Even a modest amount of work — even if it's not highly paid — completely changes the calculations with regard to financial independence. Every thousand dollars a year that you can earn reduces the amount of capital that you need to set aside by at least 20 to 25 thousand dollars.

(In exactly the same way, of course, each thousand dollars a year that you don't need to spend because you're living frugally also reduces the amount of capital you need to set aside by 20 to 25 thousand dollars.)

The advocates of this capital-based version of financial independence point out that having a large capital-based income stream certainly doesn't prevent you from working. Rather, it frees you to do whatever sort of work calls you, regardless of whether it pays enough to support you.

I agree whole-heartedly. I just want to extend that vision, by observing that it's not a case of either/or. You're not 100% trapped until your investment income matches your spending and 100% free afterwards. Even a rather modest capital-based income stream begins to free you. Capital that generates just a few percent of your annual expenses can make it possible to take a job that's more interesting than a better paid one.

In your struggle to live life according to your own values, income from capital is a powerful tool. That's true long before your investment income is high enough that you don't need to work at all.