Try this maths at home
Let’s assume you can save 10% of your income.
- Save 10% of your income for 10 years. You’ll have 100% of your annual salary saved.
(10% x 10 years = 100%)
- Save 10% of your income for 40 years. You’ll have 400% of your annual salary saved.
(10% x 40 years = 400%)
Makes sense, right?
So let’s get this straight…
You could work your butt off for 40 years and you’ll only have about 400% (or 4 years) of your annual salary stashed away. So if you start at 20 and retire at 60, you’re out of cash by 64 years old.
That’s pretty scary, am I right?
But wait, there’s more!
Most people don’t even save 10% of their income. In fact, the average personal savings rate in the USA is only about 3.5% at the time of this writing.
So if you adjust your calculations to 3.5% and do the same math over 40 years (3.5% x 40 years of grinding)… that leaves you with… 1.4 years worth of salary.
At that rate, you won’t even make it to 62 before you run out of cash.
This math lesson is beginning to look crazier and scarier by the minute…
But wait, there’s still more!
Because we haven’t even talked about inflation.
Remember, inflation is a hidden tax on your savings. Every year, the cost of living goes up and the buying-power of your stashed pennies drops. (Even your car needs more cents in order to get a good slurp at the gas station). Over the long term, the cost of living doubles about every 15-20 years on average.
So once we factor this into our calculations as well, your 1.4 years worth of salary falls to just months.
“The average person will work their entire life. And by the time they retire, if they ever do, they’ll have saved months worth of liquidity before they’ll need the government (or their children) to bail them out.”
But at least they’ll have this, right?
To be fair, most people are at least peripherally aware that relying on savings alone is a loser’s game…
So the masses use two key strategies to try and get ahead:
- Get a university degree – The logic here sounds reasonable. Get a degree, earn more money.
- Buy a home – This is the most popular investment for the middle class.
So let’s talk about these strategies real quick.
Increasing your active income is a trap
Financial Independence occurs when your passive and semi-passive income exceeds your expenses. Therefore, the lower your expenses, the easier and quicker it is to achieve Financial Independence. The counter-intuitive reality here is that the leading cause of rising expenses is a rising active income.
Climbing the corporate ladder literally entraps you in the 9-5 grind.
“It’s harder to replace a big income than it is to replace a small income.”
When you have low income, you’ve also usually got low expenses. And because saving, investing and building wealth is largely a percentage game you can achieve Financial Independence even quicker when your active income (and expenses) are low.
“When you have passive or semi-passive income, it’s scalable separately from time input. But if all your income is actively generated because you became a lawyer, doctor or accountant… you can’t scale or outsource it very easily, if at all!”
If you are pursuing a high-paying career, be sure to consider the extra costs that accompany that life:
Cost of formal education (it’s usually overpriced)
Charges of having a prestigious office in the city
The need to wear the best suits and dresses
A nice apartment to keep up with your colleages
Gadgets, toys, the latest BMW’s and Audi’s
Trying to keep up with colleagues on higher rungs
If you get caught in the “lifestyle trap” aka trying to keep up with the Joneses, it will keep you on the hamster wheel.
I’ve seen many cases where the corporate employee making $150,000 per year saves a lower percentage of his income than a $40,000 per year part-time worker.
Buying a home is a trap
Let’s say you buy a home in your 30’s for $500,000 and by the time you turn 60, it’s worth $3 million.
That’s $2.5 million in equity, nice work! You’re a millionaire 🙂
I wouldn’t disagree that this is a possibility. The real question is, can you buy breakfast with that $2.5 million? Could you slide out a brick from the house itself, take it to a café and use it to buy avocado on toast with a hash brown on the side?
The only way to access equity in your own home is to either borrow against the house (which is ridiculous, because you have to pay interest).
Or you could sell the house and use the cash. The good old “buy low, sell high” strategy.
But wait, if you sell your house – where will you live? Remember, if your $500k house went up to $3M, so did all the other houses. You’ll be buying in at the same price, meaning you can’t use the equity growth anyway. The only way this works is if you downsize to a cheaper house, where you might be able to finally access some of the capital growth. Imagine working your whole life only to be downsizing, scrimping and living on the cheap in your golden years.
That’s not mastery. That’s insanity!
Follow the tried and tested methods of building wealth:
Save 10% of your income minimum
Don’t leverage yourself out with credit cards and loans
Increase your savings rate every 3 months
Create a 3-6 month cash cushion ASAP
Learn how to invest the surplus at 7-10% pa
If all you do is…
Save 10% of your income, accelerate the savings by 10% every three months and invest it all at 10% pa (the typical return of the stock market over time)… you could create complete passive income replacement in approximately 20 years. (Plus or minus 20%, depending on income growth, inflation, minimum expense floor and some other factors)
If you think you can’t save 10% it’s a lie. You can. It’s just not a priority. Go and figure out what costs you can cut, so that you can stash 10%. It may feel hard at first, but you’ll get used to it in about 90 days. After 90 days, when you’re used to that amount, increase the savings. Continue doing this every three months until you reach your minimum expense floor, then still try to push through it!
But if you also do this…
- Increase your income by at least 10% every year
You could create complete passive income replacement in approximately 10 years. (Plus or minus 30%)
Increasing your income by just 10% every year will allow you to shortcut your retirement plan from 20 years down to 10 years. That’s a huge difference, right? You can do this by creating passive or semi-passive income with side-businesses that will accelerate your income, your savings and your investments.
And finally, if you do this…
- Learn to trade or speculate a portion of your investments and generate a 20% total annual return
You could create complete passive income replacement in approximately 5 years. (Plus or minus 40%)
In my personal journey, I did all three.
By using this strategy, my income wasn’t just replaced… it rapidly grew! The house and cars I am blessed to enjoy are all paid for with semi-passive income. I could go to sleep for 6 months and wake up, and all of my bills will be paid!
That’s financial freedom.
The truth is this
Anyone can do this if they want it bad enough.
You don’t need to be a genius.
It’s not important if you earned a college degree or not.
(I went to school drunk towards the last couple of weeks because I didn’t take it seriously)
But you do need to want it. And you will have to change some belief systems.
“If you do today what others won’t, you’ll be able to do tomorrow what others can’t.”
If you enjoyed this post…
I’d love to invite you to join my Wealth Mastery Program…
Wealth Mastery is a comprehensive online video course, designed to help you master your personal wealth game in a wholistic, sustainable & purposeful way.
We focus on 4 primary areas:
- Finding your inspired purpose & calling
- Building a 4 product empire
- Passive investing to build long term wealth
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