ERE indicator

[Fish]

Instead of thinking of ecology in an environmental sense, I think the relevant angle is whether a person adds or subtracts value through his interaction with stuff. Remember the cash flow diagrams from the ERE book? This is perhaps a more tangible way to think about Jacob’s 3 types of spending if "closing the loop" and "killing the loop" aren’t vivid enough.

(1) Negative value (consumer) process:
Stuff -> You -> Waste

(3) Neutral value:
Stuff -> You -> Stuff (-> Other Person)
Waste -> You -> Waste

(2) Positive value generation:
Waste -> You -> Stuff (-> Other Person)

In all cases, you get value from interaction with stuff. To you, it’s consumption. But how much residual value remains when you’re done? This is something that money measures well, and it’s intuitive. If you add value (2), then you’re likely making money. If you subtract value (1), you spend money. If there’s no value change (3), then the net flow of money is negligible.

Now the next thing to consider is whether an absolute (Fish-method) or relative (Jacob-method) accounting is proper. Ultimately, I think both are important. The beginner should first focus on reducing type (1) activities to achieve an absolute ecological footprint below the consumer average. Once the footprint is small, then move towards a relatively "good footprint" by redirecting consumption to type (3) and (2) activities.

Here is one of my favorite diagrams from the ERE blog (Ecological capitalism and consumer capitalism).



With this thread, we are finally able to express all of these concepts mathematically!

Low expenses = Savings Rate
Investments = SWR
Passive income = FIRE Income Index
Small footprint = Consumer Index

Savings rate and SWR are selfish measures in the sense that doing well confers no direct benefit to others. There is no real relationship between one stranger’s finances and another stranger’s well-being. But value generation (measured by income) and consumption are things that do matter, especially in aggregate where they have a meaningful impact on the world. I find this makes the new measures more interesting and exciting than savings rate/SWR, and I hope they catch on.

[7Wannabe5]

I would note that the Fire Income Index measures both passive and active income sources. One other model I consider is the suggestion that a human equilibrium ideal might be 2 days of work for money, 1 day of work for community service, 2 days of creative work, and 2 days of relaxation each week. Once you are down to Jacob level expenses, 2 days of work at any minimum wage endeavor will be more than adequate, and wouldn't even preclude large blocks of time devoted to travel or other projects, since it could be 104 days of work in one clump each year, or 2 years of work every 7 years, or 2 hours of work/day. One reason I sometimes suggest that people are going into overkill zone with SWR is that they very well may discover that 7 days of relaxation is not ideal, and that even work that is meant to be community service or creative will eventually generate either money or other practical resource flows towards further reduction of expenses and/or higher quality of life.

So, if your current modus operandi is 5 days at salaryman position and 1 hour working on investment portfolio, you could temporarily bump yourself up to adding a part-time job at the cool old hardware store, volunteering at the humane society, and finally getting started on your painting. Otherwise, it's like you are training yourself to be a diligent persistent worker with the goal of becoming the exact opposite, rather than gradually developing the practices in alignment with the lifestyle you truly desire.

[Fish]

@7wannabe5: I think what you're getting at is that there is a sustainable range of SWR for converting human capital into useful labor. Someone who maximizes rate of extraction and then abruptly retires to nonproductive endeavors is slamming the brakes on the WR of human capital. Is zero WR desirable and sustainable? Personality will likely determine whether someone experiences boredom or goes stir-crazy. The idea of single-mindedly pursuing FIRE without even validating the end goal seems insane to me too.

I'm still not completely satisfied with the new indicators. Something is lost when we only take (measurable) expenses into account, instead of starting from the equivalent standard of living and identifying how different forms of capital are used to construct the lifestyle. To me it would seem reasonable to include SWR of other forms of human capital in the income and consumer indices. For example, someone exchanging social capital for free hot showers should have their consumer index reflect the transformation of that capital into valueless waste. Not because of ecology, but because social capital has economic potential while used bathwater does not. We want to encourage good spending across all types of capital. This would also improve the accounting for cases where technical capital is used to create value that is not immediately remunerated, like cmonkey has done with DIY skills to remodel his home.

[7Wannabe5]

@Fish: I should likely not even be offering an opinion on the matter of when to pull the trigger on retirement, because the likelihood that I would ever stick with a full-time corporate-type job that I did not like if I had maybe one year's expenses saved, and half of a hare-brained idea for future self-employment worked out would be close to nil, unless I was perhaps forced to ingest medication to treat my tendency towards low risk-aversion.

For example, someone exchanging social capital for free hot showers should have their consumer index reflect the transformation of that capital into valueless waste. Not because of ecology, but because social capital has economic potential while used bathwater does not.

So, I need to strictly account for every time a man with too much money gifts me with some new flannel pajamas with monkeys on them? Or does the fact that they are insulating make up for the fact that they were purchased new? Does the fact that I in no way, shape or form indicated that I would appreciate a gift of flannel monkey pajamas count in my favor in the calculation? Does the level of my stock of social capital go up or down if I graciously accept a gift of flannel monkey pajamas from a man with too much money? What services might be required of me in the future in exchange for an unsolicited gift of flannel monkey pajamas? How many potatoes worth of energy will I burn providing any such services? How many square feet of solar energy will be required to grow that many potatoes? Etc. etc. etc.

[Fish]

@7wannabe5: After considering your example and reviewing Jacob’s definition of ERE, I am dropping the suggestion to include alternative forms of capital in the income and consumer indices. If stuff is entering our lives effortlessly through non-financial means, does it matter (from a financial perspective) whether this stuff is being consumed or not?

Also, I’m losing the initial enthusiasm I had for the consumer index. If ERE is about reducing "pollution" (waste) to reduce "work" (effort) then anything that includes expenses (SWR, income index) already incentivizes good behavior. For someone who is near the expense floor I could see how the consumer index could provide a means of continued growth by encouraging self-sufficiency in food, transportation, energy, and water. However, maybe it would be more practical to first develop a clear vision of Levels 7-8 on the Wheaton Scale, agree on the desired actions we want the indicator to inspire, and finally decide on how to construct the appropriate indicator.

For those of us who are not yet focused on closing the loops, a consumer index could still be helpful for facilitating comparisons between households at different expense levels, or across locations with considerably different tax levels, real estate markets, and insurance costs.

[7Wannabe5]

@Fish: Since financial spending on consumer goods is only a rough approximation of energy usage, the correlation is almost bound to break down the further you venture from normal. The observation I have made, which I often joke about on this forum, is that my entire spending budget can almost be encompassed by just the dating/mating portion of the budgets of even my rationally frugal male cohorts (in ecological terms, this is the rough equivalent of the amount of energy the average male bower bird expends to build a bower-lol) It's like if their minimum standard is to date somebody they aren't totally embarrassed to be seen with shopping at Whole Foods, their choice is either chip in 50% to vacation in Cancun with a pilates-toned female hospital administrator who makes/spends $100k/year, or buy me a better used bicycle, an ice cream cone and help me dig some fence posts and scavenge some cardboard. Another observation I have made due to my experience as a used book dealer, which Ego's "Something from Nothing" thread also speaks to, is that once your entire financial spending gets down to approximately Jacob level, you can pretty much support yourself through engaging in further recycling of the waste of your affluent neighbors. The purpose of my permaculture project is something like determining if it is possible to financially support myself on the amount of solar energy most of my cohorts "waste" on growing a lawn. Also, once you are down to Jacob level spending and you have freed up most off your time, it is quite possible that you may find that it is possible to financially support yourself through means I will call "osmotic employment due to availability." For instance, if I am working in my garden, I can also help my neighbor out by babysitting her 6 year old and put him to work picking beans, or I could walk a dog for my daily exercise and make enough money to pay for my health insurance.

Once you start thinking more systemically, or holistically, your ability to equate time to money or money to energy degrades in other ways. This is because little clouds of mystery that used to shroud such matters as "what actually happens to all the plastic milk jugs I put in the recycle bin?" and "what rights and resources are attached to this property deed?" commence to dissipate. We all learned in high school physics that energy can neither be created nor destroyed, right? We all know that the supply of petroleum on the earth is finite (or only very slowly renewed) and the party is going to be over pretty soon, right? What do libraries and gardens have in common? Information. What is the most concentrated form of energy? Information. How can we best stockpile energy for future generations? Information. Where do we find advanced human civilization? At every intersection of a library and a garden (broadly defined : ) ) That's why humans who write essays on the topic of gardening are the most advanced and civilized. That's why if you prefer to focus on the perspective of financial conservation, it would probably be best if you either created a trust that would put all your money to use for the endowment of libraries and the creation or preservation of gardens (obviously inclusive of wilderness preservation) or you spent some of your current funds on the purchase of bicycle trailer for another human who has stated intention of writing gardening essays once she has piled up some more information IOW, maybe we can agree that mostly we don't want to contribute to the possibility of a future-scape in which our nearest human descendant will be found huddled under a rusty dumpster, subsisting on nothing but chicory root, and burning the last extant copy of "Man's Search for Meaning" in order to stay warm, although we may endlessly dicker about the details.

[Fish]

It seems the earlier discussion got stuck at Wheaton level 6-7 and never gained much interest. As an alternative to tracking total expenses, I propose measuring Jacob's "big three" expenses. This is relevant at all levels and has the added bonus of guiding beginners to focus on items of highest impact.

• Housing: Running costs of shelter, including: rent or mortgage(*), property taxes, homeowner's/renter's insurance, utilities, HOA dues, maintenance, landscaping, etc.
• Transportation: Include expenses such as: car payment(*), gas, insurance, vehicle registration, maintenance, parking, bus passes, train tickets, cab fares, etc.
• Food: Total all spending at grocery stores and restaurants.

To be more correct, travel-related expenditures such as hotel stays, airfare, rental cars, should be added to the appropriate categories. The decision is left to the discretion of the reader. Do you want to focus on reducing everyday expenses or develop more frugal vacation habits?

(*)For purposes of fair comparison among owners and non-owners, those who own a house or car in full could also add a fictitious expense for depreciation or opportunity cost of capital. For example, using the IRS useful life for residential real estate, depreciation on a house would be figured as (purchase price/27.5 years). Or you could also take (purchase price * 3% SWR) and get a very similar result. Per the IRS guidance in Publication 946, automobiles are depreciated over 5 years, though I'm sure everyone here gets much more useful life than that.

From BLS consumer expenditures survey, 2015:
https://www.bls.gov/cex/2015/combined/cusize.pdf

Code: Select all

CATEGORY              SIZE OF CONSUMER UNIT
                 1       2       3       4      5+
Food         3,989   7,085   8,526   9,771  10,015
Housing(**) 10,417  14,965  16,606  18,641  17,848
Transport    4,960   9,669  12,216  13,687  12,951
--------------------------------------------------
Big3 Total: 19,366  31,719  36,348  42,099  40,814

(**)Includes only the BLS "shelter" and "utilities" categories to be consistent with the housing category as defined above. If you use the BLS statistics as a reference point, keep in mind that the housing and transport totals include travel-related expenses.

As a reference point for FIRE, the MMM household (3 consumers) spent $16,147 on these categories in 2016 (Food=6,807, Housing=6,306, Transport=3,034). http://www.mrmoneymustache.com/2017/05/ ... -spending/

[slowtraveler]

@Fish

I get it's not your data but that post doesn't make sense. How do total expenses decrease when going from 4 to 5+ consumer unit households?

[George the original one]

Looking at the (rather small) breakdown, food goes up, but housing & transport go down. I can envisage this happening inside families as the 3 kids don't get as much individual spending/attention/personalization as the 2 kids would. The kids would be made to share bedrooms instead of each having their own, there would be better travel coordination because parents don't have the time, etc.

[AxelHeyst]

Going back to the ERE Indicator at the top of pg2, "the ERE indicator" feels a little unwieldy and kind of broad.

Fisker Income Robustness Score, or FIRS? FINROS? What's your FINROS? Does that make acronym haters want to punch me? Serious question here, I just got on to this and am going to start tracking it and posting it in my journal, but I want a better name than ERE robustness. We good with FINROS?

[nomadscientist]

Why not start a thread in the style of the SWR thread?

[jacob]

@AxelHeyst - As a member of the esteemed AHC (Acronym Haters' Club) I definitely want to punch you

+1 to starting a "Log-style"-thread to establish the name.

Call it Income Robustness Score or IR-score. Probably not IRS
Naming acronyms after oneself is corny.

[AxelHeyst]

IR-score, way better.

[jacob]

I've been thinking about how to expand the system to couples or even families w/o breaking it or making it gameable. This might require a second indicator. Lets call it the IR2-score.

I currently have an IR-score of 2.1. DW actually has an IR-score closer to 2.6. However, some of our sources are so high relative to our spending that not only can they cover ourselves, but also the other person.

The easy way to expand/generate the indicator would be to divide by 2x the spending to cover the couple. (If you want to cover 3, 4, ... N people, calculating IRN-scores should be trivial.)

So for IR2, we take the combined number of sources and we divide by 2x the personal spending for each item... (And so on for 3, 4, ... N people if applicable).

Calculating ERE HQ we get
My portfolio * 0.03 / spending / 2 > 1
ERE book sales / spending / 2 > 1
ERE blog income / spending / 2 = 0.05
DW's portfolio * 0.03 / spending / 2 > 1
DW's work / spending / 2 > 1
DW's side income / spending / 2 = 0.3

Total = 4.35

The problem is that the portfolios are correlated being investments in the same financial markets. Maybe correlated sources should be dropped. In that case, the score is 3.35. That seems to be the better way to do it. Doing it that way would also solve the issue people would encounter with joint accounts and expenses.

[7Wannabe5]

Calculating anything for household will fry my brains. The example of this problem I have encountered that makes it most obvious is when I was living with my millionaire next door “ex” who was providing majority of my financial support in exchange for domestic support, and his two teenage daughters, but my tax status was divorced/head of household, because I provided financial support for my youngest child who was in university and living in another state.

IOW, my take would be that although “those with whom you eat dinner/share roof space” is most organic definition of household, when it comes to any financial calculation default should be “those whose names you write on your tax forms” because otherwise boundaries of responsibility and authority don’t overlap enough.

OTOH, when you achieve Wheaton level equivalent to that described in Mollison’s “Retrosuburbia”, resource sharing through creation of complex “household” trumps financial flow metrics.

[Alphaville]

i measure nothing, therefore i am nothing?

i love it. very zen.

i need to stop measuring more.

[Qazwer]

Not my field but in network resiliency work I think there is a concept of redundancy vs resilience
But there is also the concept of where you draw the boundaries and how resilient each piece is to outside shocks. I can turn on a lamp attaching it to an outlet. That has a single point of failure.

I can build my own nuclear reactor, hand made natural gas generator and coal firing generator. That would be three points to provide energy. But their reliability is all correlated (I suck at building things). So although there are now three pathways, plugging the lamp in to an outlet provides more reliable light.

Portfolios can be all bitcoin. Or they might be owning 3 houses that you rent in a flood plain.

You could also have 2 income household in non-correlated fields where each income can cover expenses.

[liberty]

I'm all for building income streams beside stocks, and have started working a bit on this myself, but I don't think the IR Score makes sense. You will get a higher IR Score if you spread over different "accounts"/"categories" (or whatever to call them), but all investments are businesses, "stocks". If you rent out a room in your house, that's a "real estate business/stock", and it's not more separated from other income streams than a publicly traded real estate stock would be. If you write an app and sell monthly subscriptions, that's a software business, and not more separate from other income streams than a software stock would be. Stocks are all separated income streams, stocks can be any type of business/income stream.

[jacob]

I'm all for building income streams beside stocks, and have started working a bit on this myself, but I don't think the IR Score makes sense.

Any metric can be gamed. You have to use it in "good faith".

[Jean]

I'de max score coming from an other person to 1. Because as i see it, it's a single point of faillure.