Save as much as you can. And then save more. The benefits are enormous. First, you have more money. (You can trust me on this one. I have an MBA.) The second benefit isn't quite so obvious, but can be even more important - it lasts even longer. Huh?
Here's what I mean:
Say you make $100K a year. And let's say state and federal taxes take 25% of that. So you have $75K after taxes. If you spend $60K of that and save $15K, you spend 60% of your income and you save 15%. (You can trust these percentages. I also have an engineering degree.)
Translating your savings into time, you are saving enough every year to afford you three months worth of retirement:
15% savings/60% expenses * 12 months/year = 3 months
Now let's say you double your savings. Here's how it looks:
30% savings/45% expenses * 12 months/year = 8 months
In other words, your savings went up by 100% (from 15% to 30%), but the amount of retirement time you just bought yourself went up by 167% (from 3 to 8 months)!
What just happened here? Well, for your savings to go from $15K to $30K, your expenses had to drop to $45K. (Assuming you are not supplementing your income somehow - no meth lab outside of Albuquerque.) If your expenses are lower, every dollar you saved will last longer in retirement. It's like a double benefit.
The relationship between saved dollars and saved time is non-linear.
No matter where you are on the curve, strive to save even more. If you save 10% a year, shoot for 20% instead. If you save 20%, go for 30%. The key insight is that the incremental 10% you save is worth dramatically more than the previous 10% you saved. In fact, it gets downright ridiculous what the increment is worth:
If that isn't incentive to save more, I don't know what is.
"But Deadwood, it is completely unrealistic to think anyone can save 30% of their income, much less 50%. What planet are you from?"
Well, here is what my wife, Rooty, and I were able to do over the last ten years before I retired:
We ain't rocket scientists. And we ain't forest dwelling tree huggers. But we did it. And you can, too. For inspiration, go here.
Hey Deadwood - cool blog. I'm looking forward to learning more about how you retired early. I'm really curious about how you got your spending to 21%. What type of mental barriers did you have to overcome to do that over a sustained period of time? Thanks for sharing!
ReplyDeleteThanks for the question, James! The most important barrier to overcome is the idea that living on your cousin's couch is a bad thing...
DeleteBut seriously, there are a lot of barriers and misconceptions about both saving and investing. Overcoming them will be a key theme of this blog. So please keep checking back. In fact, for you, I'll make sure to cover one of the barriers in my very next post.
Love you blog Deadwood. I think the advice is highly practical, eloquently presented, and funny. Thank you. I really like you how express savings and expenses as a function of time. I going to try that with my finances, I think it will be a good way to incent "Saving like crazy".
ReplyDeleteWow, thanks David! Comments like yours inspire me to write more.
DeleteLove you blog! We are starving for something like this. Paid off over $100k in student loans in 10 years and will have our house paid off in 10 years. These PhD degrees are expensive!
ReplyDeleteThanks, Stephanie. Keep plugging away. There are few better feelings than paying off student loans and mortgages.
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