And the Math Shall Set You Free

By | August 15, 2014 Leave a Comment

Here's When You Will Need This

You wondered in High school when all that useless math would help you… now is the time.

Since everything I've told you so far has been mind-blowing, and has absolutely caused a complete revolution in your mind and your way of life, I hope the question lingering in your mind is this… “So you say you’re gonna turn me into a b-dass Jedi samurai financial warrior who has total freedom in his life… well, how much do I need to be saving / investing, and how much time will doing this shave off the end of my working career?”

I’m a numbers guy, and I freaking love spreadsheets. They make things so easy to postulate. So today I sat down and banged out some numbers on this for you on how long it might take you to become financial free through some simple math tricks.

Here are some numbers and assumptions, which I will use to further blow your mind and to make an example retirement plan for you:

  • You make a gross wage of $52,000, the median average earnings in the US in 2014.
  • You never receive a wage increase over the course of your entire working career
  • The savings you invest have an average annual return of 5%—extremely conservative
  • You save just 10% of your income—six times the average American
  • You start saving this percent of your income when you are 25, regardless of income level
  • You can retire when the passive income from investments exceeds your expenses
  • Your personal monthly spending when retiring is $2400 ($2000 plus a security buffer of 20%)—easily attainable for ANY RATIONAL PERSON if you have no debt whatsoever
  • By the time you retire, your home is paid off (easily) and you have no car or student debt weighing you down, which ensures that your expenses remain low
  • You need just 4% of your savings deducted per year, which you live on so you don't have to work
Assuming you make no additional dumps into savings, like bonuses or inheritances, you will retire in 26.8 years, at an age of about 52. Not bad. It’s not 35, but its definitely not 65 either.

Remember:  The less we spend, the more we can save. And the more we save and invest, the quicker our pile of cash grows, so we can retire. So let’s crank this up a little. Let’s say you always dump your yearly average tax return of $1200 into your savings instead of blowing the money on crap like a big TV or a swag vacation.

Now you retire in 25.4 years. By not blowing your tax return on crap each year, you shaved 1 year, 4 months off your working life. Way to be!

But let’s get even more b-dass. Let’s dump the measly $4000 you get for free every year by using a simple budget “trick” invented by me, your Village Leader, into your investment account.

Holy torpedoes Batman! Now you can retire at 48 after 23.1 years. That’s 17 years before Big Brother expects you to. The math does not lie, and it will begin to set you free as soon as you embrace this reality.

What happens if I save more than that?

BUT THAT’S NOT ALL. Now we’re really going to crank this up. What if you ramp up your savings PERCENTAGE, to say 15%? That’s just an extra $168 per month. Brown bag five lunches a month and get a cheaper phone plan… and now you’re retiring at 46—a full three years earlier!

Are three years of your life worth eating fast food a few times a month, or unlimited internet on your phone, which you don’t use anyway? Think about the tradeoff here. This is good stuff!

What happens if we crank up to a savings rate of 20%? Retirement age drops to 45. You’re done working before the kids even graduate high school!

What if we ignore one of our assumptions above and account for increase in salary? The math is pretty dang powerful. By getting a raise or a higher-paying job at $75,000, and ensuring that your expenses stay low, you can increase your savings contribution dollar amount to 44% of your income, and cut time to retirement down to 13.4 years! You’re only 39! Your kids aren’t even in high school yet!

Or what if you get smart with investments, and figure out how to achieve higher returns that boring old mutual funds… increasing investment returns by just 1% per year? This tends to cut off 2-4 years depending on your income level.

Math is fun, isn’t it? Keep in mind—this is all dependent on your savings rate. Salary increases accelerate the process, but the percentage of income you are dedicated to saving determines how early you can quit your day job.

And, the more money you are saving, the more money you have that is earning more money all by itself. It’s the exponent factor that you hated in high school… which is now apparently your best friend. You probably never even realized that math could be so good to you when it came to financial freedom.

Here’s a table outlining the savings rates and working years we went over above. You want to be as high on the % spectrum as possible, as this decreases your working years.

Now that I’ve wowed you with my financial Force-like wizardry, you probably have boatloads of questions. When I first discovered the math was this easy, my next question was, “But how do I keep that much money? I think I spend too much for that kind of saving allowance.”

Welcome to the club--so does the rest of this God-blessed country. That problem is our next beast to slay. But before I do, I want to share with you a few mind-blowing facts about saving with you... to help you realize not only how precarious our own country is in its current financial situation, but also how well-off other countries are (even ones we consider "third-world") compared to the good 'ol US of A.

Older Post Newer Post Home