We just spoke about saving your way to some capital to start a business and here’s Steve Olsen talking on his blog about a man that he met who managed to do just that by saving 50% of his income:
I heard a 60+ year old man say this today…
When I was 18 I made a decision. I decided I never wanted to be under financial stress. I have lived that decision my entire adult life and have never experienced financial stress. How did I do it? I saved 50% of my take home income without exception. I’ve had months I’ve made $100, and other months I’ve made $100,000. But regardless, I still saved 50% of my income. My income has fluctuated but my saving percentage hasn’t. This has enabled me to purchase several business and a large ranch without incurring debt. I hear people say ‘I couldn’t possibly live on 50% of my income.’ Oh! baloney, you choose not to. Sure it’s harder once you have a 400K mortgage and kids in private colleges, but you decided to live that way. You don’t need to live that way. And if you had decided when you were younger to live differently, you could have your 400K home and private college today without a dollar of debt.
I’m not trying to preach. I don’t save 50%. But I know everything this man said is true. I could have saved more, and if I had, I’d be much better off today.
First of all, I stick to my guns: you CAN’T save your way to wealth!
For example, let’s look at Mark from our 7 Millionaires … In Training! ‘ grand experiment’:
My current monthly net income after taxes is about $6,425
I haven’t tracked my expenses in detail for a while even though I’ve been using Quicken and I’m surprised to see some areas where I can easily cut down.
Current Monthly Expenses (average for the last 12 months):
- Housing – $980
- Gifts (gifts for family and friends, mostly family) – $925
- Auto – $267
- Entertainment (been to many concerts, musicals, activities and events) – $266
- Utilities – $256
- Dinner and Lunch outside – $228
- Vacation (low number since I’ve used airline miles for 2 international trips) – $224
- Charity – $191
- Misc (Electronics, Clothes, Insurance, Cash) – $406
The total is about $3,743.
This indicates a savings of $6,425 – $3,743 = $2682
Jeff put it best:
Your “living the good life” activities account for about 43% of your monthly expenses (gifts, travel, eating out, entertainment). I’m not proposing eliminating everything, but if you cut those expenses by 1/3 – 1/2, you could increase your monthly surplus (or profit ) by 20-30%. In an extreme case, eliminating them all together could boost your monthly profit [savings] by 61%.
Sure adding an extra, say, $800 p.m. can put Mark into High Income / High Saver territory, producing a HUGE $11 mill. in 25 years …
1. That’s ‘only’ $4 mill. in today’s dollars and Mark has to wait 25 years to get it … Mark’s Life Purpose requires $5 million in just 10 years
2. In 10 years of frugal living Mark will ‘only’ have $1.25 Mill. in today’s dollars … certainly not enough to even reopen up the spending gates
It seems that you really can’t ‘save your way’ to your Number – even if Mark saves 50+% of his income – unless he’s happy with the $4 Mill. in 25 years scenario (better than being broke, right?) …
… but, the secret is in what the person in Steve Olsen’s article did with the money he saved; here it is again:
My income has fluctuated but my saving percentage hasn’t. This has enabled me to purchase several business and a large ranch without incurring debt.
Now, what do you think the businesses and ranch did for his income and lifestyle?
So, the reason why I promote making Money 101 activities such as saving more, paying cash, and delaying gratification is that it allows you to build the capital required to make a lot more money later …
… you really need to be saving more to help you increase your income:
a) By building up a ‘war chest’ (working capital, R&D costs, etc.) for your investing activities and/or business ventures, and
b) By building up a ‘backup reserve’ in case things don’t work out.
As I told Mark:
Save a little now, so you can still afford to spend more later …
… but, ONLY if you are serious about your Number, otherwise spend away! Go ahead and enjoy your life as it is, you’re already ahead of 99% of those in your age group
Saving isn’t going to get you to wealth quickly.
But I think it should be a firm component of everyone’s financial strategy for a few reasons.
First, as you mentioned you can use the money saved to buy a business.
Second, if you aren’t willing or able to be an entrepreneur saving is the only way to retire comfortably.
Lastly, if your business venture flops see #2.
Great post and great reminders. The savings does very little if you aren’t prepared to put it to work for you! We have been cutting our living expenses even tighter and saving 50 and sometimes 60% of our income lately, but only when we jump in and use it to purchase income producing assets will it keep us on our required annual compound growth rate to get to our number by our date.
“Sure adding an extra, say, $800 p.m. can put Mark into High Income / High Saver territory, producing a HUGE $11 mill. in 25 years …
1. That’s ‘only’ $4 mill. in today’s dollars and Mark has to wait 25 years to get it … Mark’s Life Purpose requires $5 million in just 10 years”
Did I read this right…by saving an extra $800/mo, Mark will have enough money to live the retirement lifestyle he wants, albiet 15 years after his target date? [since his goal of $5 million in 10 years only requires $3.377M in today’s dollars]
That doesn’t sound like as bad of an option as you make it out to be…
How did you assume that $800/month will turn into $11,000,000 in 25 years??
I love this site but sometimes I think the assumptions of 50%+ compounded growth rates over long extended periods of time is a little excessive. I own 2 fairly successful small businesses and have seen roughly 75%+ growth in my net worth over the past 5 years if I want to count “conservative” business equity and if that continues, then I’ll blow past my number ($12.5 Million in 5 Years from now will be more like $30 Million in 5 Years!). I just feel that at some point the growth rate is not “as” easily sustainable (although I’d LOVE to be wrong!!! 🙂 )
“How did you assume that $800/month will turn into $11,000,000 in 25 years??”
Here’s my best guess. Mark currently has a net worth of $200,000 and is currently saving $2682 a month. If he cut back his expenses by $800/mo and invested all of his net worth and month savings ($3482/mo) in an investment that got ~12% annualized return, he would have $11 million in 25 years.
@ SaveBuyLive – Great summary; everyone should print that off and stick it to their fridges or bathroom mirrors 🙂
@ Scott – Exactly!
@ Jeff – You’re right; the inflation-adjusted numbers are ‘only’ $4 mill. v $5 mill. (what’s $1 mill. b/w friends?!) …
… but, if you’re 35, and – instead of having the money to start living your Life’s Purpose – you’re faced with another 15 years of drudgery, you might have second thoughts?
But, if working until 50 doesn’t faze you … keep saving! 🙂
@ DrDollaz – A super-high savings rate (I’ve assumed that his salary, hence savings, goes up with inflation) and simple compounding actually does it! I can’t remember my exact numbers (I usually just assume 8.5%) but, Jeff’s calc’s seem to make sense …
The real issue is that Mark can’t possibly maintain this (increasing) rate of savings as he is now single and ‘life’ (mortgages, dependents, etc.) will catch up with him sooner or later … when that happens, his $25 mill. ‘target’ will disappear. Not to mention, a 50+% compounding for 25 years would have us all calling Mark: All Hail Grand Emperor of Earth And It’s Immediate Environs 😉
But, your point about sustained 50+% compounding – even for the 5 to 15 year ‘life’ of the typical business – is a great one … it just happens that I have already written a post about this, and will drop your comment into it … as you spell out the problem very nicely. Thanks! 🙂
Great post. You’re right… the secret was that he made his money work for him. I am having a hard time getting my family on board with me in cutting costs and saving more. They say they would “like” to but do not support it with actions. But, I am workin’ on it! Because, we owe a lot of money to get our debt paid down and I don’t want to do that for the rest of my life! 😉
You write a lot about the need for risk; your exercise in which you have people calculate their number essentially points them toward their aim reifying the need for big thinking and risk.
An interesting post about cities needing to do the same:
@Adrian – I couldn’t agree more about the “life” being thrown in the way 🙂 I used to save 50%-60% of my income until those things happened! But you gotta live too! 🙂 Once I stopped being sooooo cheap and frugal about everything, my income shot up about 3 times from where it was when I was so damn frugal! (and I’m having a lot more fun while still watching my net worth grow significantly!) I’ve never been a fan of the personal finance “guru’s” who want to cut costs, pack a lunch, don’t go out to dinner, blah blah blah. I always laugh b/c you’re not going to eat hamburger all of your life and then wake up 30 years from now and start eating steak! 🙂
@ Timmers – The ‘city stuff’ was way over my head 🙂
But, I liked this comment from the article that you linked us to:
“It comes as no surprise to me to hear entrepreneurs talk about starting a business after losing a job or going bankrupt. That lowers the risk threshold to the new dramatically. If you have to quit a six figure job to launch an uncertain new business, that’s a much more high stakes move.”
It’s the reason why I say Most Doctors Aren’t Rich:
@SaveBuyLive – Good summary. My savings is indeed my fallback. Not all of the remaining $2682 goes to traditional retirement accounts. They are allocated as follows in the related post:
The $2682 goes into the 401K ($891), ESPP ($1248), HSA ($162) and building cash reserves or fund investment activities ($381).
@Adrian – I agree that the picture changes when I’m no longer single. In fact, since I’ve just moved, I expect that the numbers will change as well. I hope to repeat this exercise in 6-8 months time to compare.
@DRDOLLAZ – I think it is no fun being cheap and frugal as you have figured out. I’m not spending beyond my means either. However, I’m not investing in generating alternative source of incomes at the moment except for a rental. I expect to be involved in more MM201 strategies as I’ve stabilize my MM101 activities.
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