More financial advice (hint: it’s all in your savings). Some excerpts:
For almost six years, I’ve been preaching a different brand of financial advice from what you see in the newspapers and magazines. The standard line is that life is hard and expensive, so you should keep your nose to the grindstone, clip coupons, save hard for your kids’ collegeeducations, then tuck any tiny slice of your salary that remains into a 401(k) plan. And pray that nothing goes wrong in the 40 years of career work that it will take to get yourself enough savings to enjoy a brief retirement.
Mr. Money Mustache’s advice? Almost all of that is nonsense: Your current middle-class life is an Exploding Volcano of Wastefulness, and by learning to see the truth in this statement, you will easily be able to cut your expenses in half – leaving you saving half of your income. Or two thirds, or more. Sound like a fantasy? Not to readers of this blog.
What happens when you can save more of your income? As it turns out, spending much less money than you bring in is the way to get rich. The ONLY way.
And the effects are surprising: if you can save 50% of your take-home pay starting at age 20, you’ll be wealthy enough to retire by age 37. If you already have some assets now, you’re even closer than that. If you can save 75%, your working career is only 7 years.
The bottom line is this: by focusing on happiness itself, you can lead a much better life than those who focus on convenience, luxury, and following the lead of the financially illiterate herd that is the TV-ad-absorbing Middle Class of the United States (and other rich countries) today. Happiness comes from many sources, but none of these sources involve car or purse upgrades.
Is that all too fluffy and philosophical? OK, fine. Here’s how to cut your life costs in half. Start by getting rid of your Debt Emergency if you have one. Live close to work. Move to another city if you enjoy adventure. Don’t borrow money for cars, and don’t buy stupid ones. Ride a bike wherever you can. Cancel your TV service. Stop wasting money on groceries. Give your kids the opportunity to achieve greatness without being pampered. Lose the overpriced cell phones. Learn to appreciate the life-boosting joy of using your own body to get things done. Learn to mock convenience. Practice optimism.
That should do it – about half of your expenses, gone in one paragraph. Keep going, as many readers do, and you can save closer to 75% of what you make – especially for those with above-average incomes.But then what do I do with all the money?
You invest it. In stock index funds, in paying off your own house, in rental houses if you are interested in local real estate, and in other sources as you continue to learn about making money work for you. As of 2016, my own retirement income comes from a dead-simple asset allocation: a bunch of index funds at Vanguard and Betterment which pay quarterly dividends.
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Because here’s the thing about your 20s. They are the time to work. The very, very best time in your life to work your ass off and create an exponential snowball of money, skills, and friendships. Your brain will never be more sponge-like and inexhaustible. You will never feel more motivated and less cynical than you do now. And you will never have another decade of pre-childraising freedom in your life. For the roughly 90% of people who plan to have children at some point make note of the following two bricks of wisdom:
• No matter how much you like working right now, Shit can get Old … fast.
• Kids are way more work than you expect, accelerating the aging of the aforementioned Shit.
These days, kids tend to happen in your 30s. If you attempt that feat with nothing but a well-networked career and a hangover, your life will suck. You need to be well back from the financial cliff, not worried about how you’ll cover the next round of bill payments if you lose your job. It works even better if you’re completely financially independent by that point.
Gaining your Pleasure through Creation, not Consumption
The Elite Daily article builds its case around advancement, networking, and socialization. All good things, to be sure, but also a bit of an illusion. We all like to fantasize about a $60,000 raise brought about by drinking the right mixed drinks in the company of the right influential people. And sure, maybe occasionally things like that do happen. But to think of this as an actual strategy for getting ahead is roughly as smart as bringing your lucky numbers to the lottery vendor faithfully every week and crossing your fingers for the big win. In real life (even New York City real life), you get paid for getting really difficult shit done, better than anybody else can do it.
This means fiddling with meticulous, gigantic spreadsheets at 11:56 PM so you can get the impressively casual email to the department polished and sent by 2:30am. Or wiring your brain to source code and compiler windows spread out across three 34″ monitors on your stand-up desk while you design software in zen-like silence at 6am before everyone else shows up at work. Or revising and re-researching your latest article for Elite Daily for the 55th time so it’s better and more viral than any article ever written before. It means training your body and mind in your off hours so that you can perform better than anyone else in the on hours. Inhaling books on investment, psychology, nutrition. Barbells and pullup racks in your apartment where your peers keep the Louis Vuitton purses and Apple products. Mixed greens in your apartment fridge where your peers keep redbulls and $50 bottles of vodka.
Sure, there’s more to life than work. There’s plenty of room at the edges for laughs over fine tequila and winks over surreptitious servings of weed. You can dance and feast and have ill-advised romances and circulate in the penthouse parties of billionaires. But this stuff is just the icing. It doesn’t make a good foundation. Work is the foundation, and all other activities need to be metered carefully to fit around that core of work.
When you find that rare eligible workhorse, you grab her and shower her with money and opportunity, hoping she will accept. You need to be that lone workhorse, getting stuff done while everyone else is out late and living off of credit cards and parental subsidies. This is where money comes from. Luckily, this is a happy situation and something to celebrate rather than dread. Doing your ultimate work is the core of human satisfaction. Filling the rest of your life with fun around this core makes things even better.
If work is your core rather than buying yourself treats, money automatically takes care of itself. This means you don’t need to painfully crimp your lifestyle to dribble a few percent of your income into savings. Instead you painstakingly design your lifestyle so you end up keeping and investing more than half of what you earn. Not hundreds per year. Tens or hundreds of thousands per year. Sure, you’ll blow a few hundred here and there, but you won’t do something completely apeshit like buying a multi-thousand-dollar wardrobe or financing a new car. These would just be distractions from your real life goals, so why would you allow them to steal your focus?
Working with this level of focus brings you an unusually high income. Balancing it with less personal pampering allows you to spend less than everyone else while feeling like you are living like a rock star. The end result is being relatively wealthy while you’re still fairly young, and then realizing it was a damn good thing you did that, because by age 30 you’re ready to start doing your own thing without having the need to pay the bills get in the way of it. This leads us to our final brick of wisdom for 20 somethings:
There is a lot more to life than your 20s, and if you do it right, life keeps getting more fun.
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If you put 50% of each paycheck into retirement, that means that you are living simpler, and that you’re able to maintain a simpler lifestyle that costs $25,000 per year. When you put 10% of each paycheck into retirement, you are living a much more extravagant lifestyle that costs $45,000 per year. This is another place this effect works so well – since you have already adapted to living a less lavish lifestyle, it will take you even less time to retire, because you need less money to live off of; 44% less in this example.
“The key to success is to run your personal finances much like a business, thinking about assets and inventory and focusing on efficiency and value for money. Not just any business but a business that’s flexible, agile, and adaptable”, says Jacob Lund Fisker of Early Retirement Extreme.
Assuming an interest rate of 6% on your investments, if you allocate 30% of your income to your retirement, you will have to work for about 28 years before you can retire and live off of your savings for life. You will work for 16 years saving 50%, and if you save 75% of your income, you will only have to work for eight years until you can retire.
These calculations also assume that you won’t make a single penny extra after you retire.
What about a new car? The average person spends $29,217 on a new car.4 If you’re able to live off of $30,000 per year, investing that $30,000 you would have poured into a new car into your retirement will let you retire a full year sooner. And of course, that assumes you don’t get interest on that amount. If your investment returns 6% interest, at the end of only 20 years, that same amount will be worth $99,306. In other words, you would have to work 3.3 years longer because you bought that car.
By the way, if you live off of that same $30,000 a year, cutting out that latte will net you an astounding $87,423 after 30 years at 6% interest. In other words, you would have to work 2.9 years longer because you buy a daily latte.In this example, cutting out your daily latte and a new car means you can retire 6.2 years sooner.
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