Today’s question comes from Grainne. She asks:
I came to the financial independence route a bit late. I spent my 20s as a consumer racking up a huge debt. I realised when I turned 30 that things had to change. I discovered minimalism and stopped buying so much stuff and got rid of my debt as quickly as possible. Through this I discovered that investing isn’t that hard and once all my debt was paid I put my previous debt repayments into investing. But I only started this at 34. Now at 35 I invest 50% of my income into Vanguard lifestrategy 80. My main concern is that I’ve left it too late and that the magic of compounding in my 20s has been lost. I also have a regular civil service job earning 42k a year. (My 42k a year is actually before tax, national insurance and pension contributions. My take home salary is 30k.) I tried for promotions but can’t see this amount changing too much. Most people who retire early have very well paying jobs in IT or finance. Can regular people with regular boring jobs retire early too?
Like I always say, it’s all about the relationship between your numbers.
It’s easier for high earners to save a lot, but that doesn’t explain the millions of high earners living paycheck to paycheck.
Because it doesn’t matter how much you earn, what matters is your ability to save. To live on less.
Look at the people profiled in The Millionaire Next Door. These are people working regular jobs, driving regular cars, wearing regular clothes.
If you saw them on the street they wouldn’t look rich, but they’re richer than the doctors and lawyers and everyone else busy upgrading their lifestyle.
Here’s how the math works for financial independence. Let’s say you’re earning $100,000 and spending $40,000. That means you need $1 million ($40,000 multiplied by 25).
This is based on the 4% rule. The 4% rule means you can safely withdraw 4% from your investments each year, adjust your withdrawal for inflation, and never run out of money.
How long does it take for $1 million? When you’re investing $60,000 a year and getting a 7% return, 10 years. (Here’s a calculator.)
And yes, not everybody is earning $100,000. What if you’re earning say, $50,000?
Well, if you’re spending $40,000 you need the same $1 million, but that takes 30 years investing $10,000 a year.
Reduce your spending to $30,000 and you need investments worth $750,000 ($30,000 multiplied by 25). That takes 18 years, shaving off 12 years.
Spend $20,000 and you need half a million ($20,000 multiplied by 25). That takes 10 years.
Here’s another way to look at this. People who earn $100,000 and spend $40,000 can retire in 10 years, the same as people who earn $50,000 and spend $20,000.
You see, every dollar you don’t spend is accomplishing two things: it reduces the amount you need, and reduces how long it takes to get there. This concept works equally for everyone.
But the biggest problem I see is when people try to get their spending to zero. They brag about switching to flannel toilet paper to save $17 a year.
At some point you’re wasting your time because you can be spending that time maximizing your earnings.
You don’t even have to “spend money to make money”. Looking back, I earned more by making investments in myself that cost little to nothing.
You can get a career mentor, join a mastermind, add new talents, or just read books and upgrade your knowledge.
What you’re doing is making yourself more valuable, and when you’re more valuable people will pay you more for what you do.
The best part? Getting a $5,000 or $10,000 raise isn’t just one big novelty-sized cardboard check. You get that $10,000 every year.
Think about that. One $10,000 raise is worth $100,000 over the next ten years.
Where should you be spending most of your time: trying to save a nickel, or trying to earn more? Which one helps you get to your goal faster?
If all that makes sense, maybe don’t worry too much about your situation.
You lost out on compounding in your 20s, but you’re 35 with decades of compounding in front of you.
You take home $30,000 and spend $15,000, which means you need $375,000 ($15,000 multiplied by 25). Starting from nothing that takes about 15 years.
So what? Don’t sit there and beat yourself up over it.
Look, the past is gone, and there’s nothing you can do about it. All that’s left is what you’re doing today, and what you’re doing today is what you need to be doing to get the things that you want later.
You should be proud that you woke up at 30, because the most frustrating emails I get are from people in their 40s and 50s asking if it’s too late.
They tell me they have nothing saved so they’re worried sick, and I tell them if they’re worried sick they need to be doing something about it.
Sometimes they write back years later. They say they started saving and investing and if only they could go back and tell their 20-something self to start.
I have no clue what happens to the others.
I’d like to think they took action, but if you know people then you know it’s just as likely they’re still sitting there saying, “I’ll get to it someday.”
The reality is the people who are always getting around to it end up with nothing. If you save nothing you get nothing. It’s as simple as that.