Ramp Up Those Savings!

What would you do if you won the lottery right now and became financially free? Would you work less, travel more, move to another part of the country or an entirely different country? Maybe engage in charity work or educational activities? Become become an excellent suffer (yes, I live in SoCal) or just lounge at the beach?

Assertively pursuing your financial independence allows you to achieve these types of life goals, rather than give them up, and hopefully get to them much more rapidly! So how can you achieve this? Well clearly it is earning more and/or spending less, and maybe somewhat surprisingly, it’s the spending less that really acts as the turbo charge in this equation.

Let’s look at this in more detail: The most obvious results are that if you can already spend 0% of your earned income, and can continue to do so while in ‘retirement’, congratulations you have made it! Please note that if you are young and healthy or even just healthy, you may find that in your so called retirement you are a much busier person but by choice, and doing things you want to do rather than have to.

If you are spending 100% of your income you will never be financially free, unless you can have another source of income such as a nice pension plan, which is pretty rare these days, or perhaps a rich spouse?

Now let’s look at the in-between regions, as this is where things get really interesting. (I found this page: http://www.ploutus.com, which provides a nice and simple to use graph on comparing the % savings rate to years until financial independence).

The average american, if there is such a thing, saves around 5% of his or her income each year. After 50 years at 5%, i.e. starting work at aged 20 and continuing until 70, this person still doesn’t have enough saved for independence or in this case retirement.

At around 10% of salary saved, a commonly recommended savings rate, you can be financially free after just a little over 40 years. Thus starting at 23 years after an undergraduate degree will allow for retirement at 65ish, so at least you can retire.

Let’s double the savings to 20% now. Well, now it is only 30 years until retirement or independence. For the 23 year old, I think that they will be able to spend their time doing a lot more active things at 55 than at 65!

How about 25%? It is more like 26 years, an extra 14 years earlier than 10%. Let’s go to 40%, now it’s only 18 years, so start at 23 and retire at 41, not bad at all.

Let’s go to some higher savings rates for some fun. 50% savings is only 15 years, 60% is a mere 11 years, 65% is under 10 years and 70% is now only 8 years. Yes, that is only 8 years until full financial independence. Wow, just how great is that!

At the end of it all, the thing that really makes me try to hit the 50% mark or higher is this (it is maybe a bit of an over simplification of the math, but gets the point across extremely well):

If I save 10% of my salary, it takes me 10 years to earn just a single year of freedom 🙁  The poor average american at 5% has 20 years to obtain 1 year of salary, so at this saving rate it maybe best to keep working until you drop.

However, if I hit 50% savings rate or higher, every year that I work has now earned me at least another year of financial freedom 🙂

Overall, this is a particularly important subject, and so I’ll discuss it in more detail in future posts.