We talk a lot about saving money and long-term financial thinking here at RichmondSavers.com. To our family there is great happiness, security and satisfaction in this type of lifestyle. However, we know in our instant-gratification culture a lot of people think we have it backwards. They think it makes them happy to buy expensive clothes, TVs, cars, houses, etc. and that we are somehow depriving ourselves by not buying a BMW or McMansion that we clearly can “afford.”
The goal of this article is to explain the power of a saved dollar, the value of decreasing your expenses, and why we feel so strongly that financial mindfulness and planning can lead to greater happiness and control over your life.
Your Financial Life
Your financial life each year in its most simplistic sense is this: You earn an income, taxes reduce that income and what’s left is yours to spend or save as you see fit. Most people spend 100% of that money, and because they’ve done that their entire lives, they have essentially zero money saved.
This means they are living on the financial edge every single day of their lives. If the washing machine breaks, that $500 expense can be an insurmountable obstacle. Money is always on their minds; they always have to worry about whether they have enough money in the checking account, when payday is coming, if they have enough to cover the rent, mortgage, or credit card bill that month. They have to consider every expense not in terms of value, but in terms of ‘do I have enough money at this very moment to pay for this.’
That is an extraordinarily stressful existence!
Most Americans just assume that’s how life goes, because that’s how their parents lived, and that’s how their friends and family live. We’re here to tell you that life can be a whole lot simpler and less stressful if you just start saving money today.
When you have money saved it frees you to live a life of your choosing. You save and invest to grow your money for the future; you can make smart purchases or investments when you want, since the money is always available. You aren’t constantly stressing about not having money that month, or about the timing of your bills and your paychecks – you are free to live life on your terms.
Taking Control of Your Life
There is happiness in living simply. There is satisfaction in living, to all outward appearances, the same middle-class life as everyone else, but knowing that you’re setting yourself and your family up for long-term security and wealth by just being a little bit smarter than the next family.
There is immense power in a saved dollar, and it can help you in a number of ways:
Saving Money Gives You Control Over Your Life
Most Americans desperately need to be employed every single day of their lives, as one missed paycheck can send them spiraling into a financial abyss. How do you think this impacts how they look at their jobs? It forces them to be subservient, to be immensely thankful for their employment, to take whatever their company throws at them and to feel weak and powerless.
What if you had a year’s worth of expenses saved in the bank? What about two, three or even five years’ worth? How would that change how you feel about your job? You’d know that you don’t have to deal with any indignities; that you have power and could walk out at any given moment and never look back. That’s a great feeling!
Reducing your expenses and saving the extra money ties directly into our point about control over your life. Let’s say your after-tax income is $50,000. If your monthly expenses are $4,000 and over the years you managed to save up $12,000, then you have enough money saved to cover exactly 3 months of expenses if your income was reduced to zero. That’s not so great as you’d blow through this if you lost or quit your job.
If the same person with a $50,000 income and $12,000 in the bank had only $2,000 worth of expenses each month, they’d have 6 months of expenses saved up at that moment, and each year they were employed, they’d save an extra $26,000 ($50,000 income – $24,000 expenses = $26,000). After just one additional year, they’d have $38,000 in the bank, which would cover more than 1.5 years’ worth of their expenses!
Do you think that person will have to put with a horrible boss or work environment? I doubt it, as they will have significant power to change and control their own life.
The RichmondSavers family doesn’t live a particularly deprived life to an outside observer, so we’re not a family of misers – we just try to be a little bit smarter with our money and not constantly want or need the latest and greatest of anything. We make due with our $4 per month cell phones (saving well over $1,000 a year over the normal family), even though it sure would be convenient to each have an iPhone. But we’d rather save the money. We each have a 10-year old car and they work great. As I detailed at length in this article, by driving our cars for 15-years we’ll end our working lifetimes with almost $750,000 more than someone who leases a comparable car. It sounds like a crazy number, but the math simply doesn’t lie.
We try to constantly make small changes to save money while not decreasing our quality of life. When you put together 20, 50, 100 of these small changes, it can start to dramatically change your life. Then compound this savings over 40-50 years and you’re literally talking millions of dollars. We’re not rich now, we won’t be in 5 years, but unless something crazy happens, this savings will allow us a very comfortable retirement and the ability to direct our money where we choose.
Passive Income and Financial Independence
A saved and invested dollar provides you an investment return which allows your money to grow and compound over time. This is really a ‘passive income’ stream as you don’t have to actively work to earn this income – it just happens in the background.
The historical rate of return on the stock market over a long-term period is approximately 8%; there are good years and bad years, but if you left your money in for a 50-year period, you could expect a return of about 8% per year (we highly recommend low-cost index funds like Vanguard’s Total Stock Market Index to increase your probability of hitting that 8% return).
Let’s say you have $10,000 saved up and invested in the stock market. You could expect an $800 return each year, which is nice, but nothing to live off of. If you had $700,000 invested, you could expect an annual passive income of $56,000 – now we’re talking real money!
$700,000 sounds like an impossible target, but let’s say you started saving when you got your first job at 22 at a rate of $520 per month, every single month. Using a compound interest calculator, at 52 you’d expect to have approximately $707,000 stocked away! Each year it keeps growing at 8%, so at 53 you’d have $770,000 and at 54 you’d have $837,000 and so on.
Most experts believe you can take out 4% of your investment balance each year and the balance will be able to last you indefinitely. To put this in simplistic terms, when 4% of your investment balance is more than your yearly expenses, you are financially independent and you can retire!
Let’s look at the 54 year old with $837,000 invested (remember, it only took him $520 a month to get there, not some impossible amount): 4% of his balance is $33,500. If his yearly expenses are less than $33,500, which is quite realistic for a person with a paid off house, he can retire at 54 and expect his money to last forever.
So, contrary to everything you hear about how hard it is to get ahead and retire before you’re 70, if you started saving $500 a month at 22, you could almost certainly retire at 54. This doesn’t necessarily mean golfing in Florida every day, but what it means is you can direct your life as you see fit. You are in control and you don’t have to rely on anyone else.
Maybe you take that job you always dreamed of that only pays $20,000, maybe you build homes for Habitat for Humanity, or join the Peace Corps, coach soccer, or whatever it is that you want to do.
That is the power of saving money over a long period of time and it impacts every aspect of your life in a positive manner. Start reducing your expenses and saving money today, and you are almost guaranteed a less stressful and more secure life!
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