Let us start with a little fire on today's blog post: very few people in the grand scheme of things ACTUALLY speak the language of money. Even those that THINK they have a grip on their financials (those who make a lot but also spend a lot) really aren't doing themselves any favors. I posted a story on instagram this week explaining how the average savings rate in America (6%) is NOT enough. Why? Because you're not putting enough capital to WORK! Get those little green soldiers fighting for you.
At the average savings rate, it would take 62 year to build a portfolio large enough to retire on at your current standard of living. My calculations simply assume:
Why do I make those assumptions? Because math. Your capital needs to make more in interest than you spend, or you will be in a downward spiral. So now you may be thinking to yourself; Well darn, I only make $50k/yr. How the heck can I ever afford to retire?
You see, the math doesn't care if you make $50k or $500k, it is all based on percentages. If you make 500k and save 6% of your income, it will still take you 62 years of working to be able to retire at your current standard of living (which is spending 470k/yr). And if you make 50k and live on 47k, it will take you 62 years to build a cash producing portfolio large enough to retire on 47k/yr. There are two levers you can pull that impact your capability of retiring earlier than the average American:
THATS IT. It is that simple, you can either spend less or you can make more. Combine the two, and you have an incredible opportunity to put so much money to work that you can retire in less than 10 years. Yes, less than 10 years. How do I figure?
At a savings/investment rate of 65-70%, you will have a large enough stash to be able to live off of your investments in 9-10 years. Here is the breakdown mathematically for a 50k/yr earner with a savings rate of 67% and investment returns of only 5%/yr. All cash that is not spent or put in a savings account is assumed to be invested:
Look very closely at year number 9. The return on investments is $17.2k, which is higher than the $16.5k you have needed to live on. Magic? No. It is all possible because of some simple math and the drive to be financially independent.
I definitely don't want to be a slave to material things. So I make money my slave, I put the dollars I earn to work through investments in high quality, cash producing businesses. I do this because I know that every dollar I invest is going to bring me 5-10%, or a nickle/dime per year for the rest of my life. That is powerful stuff.
Right now my portfolio is like a chicken on a spit dripping cash, but instead of using the cash it drips out to lease a BMW, I am using it to buy more chickens. And so on and so forth, until the operation is large enough to feed/house/transport/entertain myself and everyone I love forever. (or until an apocolypse, in which case paper money probably won't be very much use anyways)
If thats a little extreme for you, you can take some of these concepts and apply them at a more "normal level. Use this website (networthify.com) to analyze your spending/investment rates. It will spit out how long it should take YOU to retire and live comfortably.
If you don't even know where to get started in investing, check out my blog post on The Glacier Approach to Investing. It is a practical and actionable set of words that will help you build the understanding you need to make your first investment! If you're looking for even more reading material, check out the book The Simple Path to Wealth by JL Collins. He writes in a very easy to understand, fatherly tone, so it is perfect for the beginner/intermediate investor.
Go out there and get your money working for YOU so one day you don't have to work for IT!
If you thought this was helpful, terrible, or somewhere in the middle, please leave me feedback in the form of a Direct Message on instagram @MakeDollarsAndSense, or feel free to send me an e-mail/text to the information on my Home Page. I truly appreciate constructive criticism and opposing views, so bring em on!
P.S. New blog posts coming your way every Monday!
I love books, so it is probably a natural progression that I have come to LOVE AUDIOBOOKS! Here is a link to a 30-day free trial to Audible, along with TWO free audiobooks of your choice. Don't like the service? No problem, they will let you cancel and you'll even get to keep the books you chose to try. Enjoy!