I was hit with a problem from 36-year-old Aaron M. who lives in North Carolina. What I liked about his story is that he and his wife, who have a 7-year-old son together, are doing everything right when it comes to living a simple and frugal life.
- They live in an affordable city.
- They rent a 725 square foot apartment located within a 15-minute walk to work.
- They own a single 11-year-old vehicle, purchased for $3,000 cash, that they rarely drive.
Because of the financial decisions they’ve made they have no debt and are able to save and invest 43% of their income. But they want more. He’s striving for financial independence.
He wrote to me, “The problem I’m finding is not about frugality. Our problem is how to maximize our income.”
What I love about Aaron is that he’s passionate about something greater than himself – financial independence, which will allow him the freedom to spend time with his family – and he’s willing to take action to get it. Now that’s what life is about.
There are so many people out there who don’t put in the work to get what they want and yet they complain about how they’re somehow being cheated. Those people just don’t get it. I could tell right away that Aaron wasn’t one of them and he had the ability to become a top performer.
So here’s his family’s current financial health:
-$35,000 + $20,000 = $55,000
-$48,000 combined take-home or $4,000 a month
-$3,000 + 1 month of expenses in checking
-$1,000 in Roth IRA
-$35,000 in Betterment broken down as follows:
- Emergency Fund: $10,000
- Roth IRA: $13,500
- College Fund: $1,000
- Travel Fund: $500
- House Down Payment Fund: $10,000
-$30 average electricity
-$35 average natural gas
-$309 insurance (health, life, auto, renter’s)
-$100 household goods
-$25 family entertainment
-$20 his “blow money”
-$20 her “blow money”
-$50 car repairs
-$45 cell phones
-$35 annual fees (various memberships, etc. divided by 12)
-$20 family holidays/special events
-$10 charitable/miscellaneous gifts
Their total current monthly expenses are $2,178.
-$10 College Fund
-$100 his Roth IRA
-$100 her Roth IRA
-$110 child summer care (cost of summer camp care divided by 12)
-$25 just in case
-$1,500 House Down Payment Fund
Their total current monthly savings are $1,845.
So if Aaron and his family want to reach financial independence they’ll need a minimum of $660,000.
I calculated that number by taking their $2,200 in monthly expenses multiplied by 12 to get $26,400 in yearly expenses. Then I took that amount and multiplied it by 25 to get $660,000 (based on a 4% Safe Withdrawal Rate).
Currently they have $35,000 saved and save at a rate of $1,800 a month. If I plug those numbers into an investment calculator I can figure out how many years it will take them to reach $660,000.
Around 15 years when Aaron will be 50-years-old. Not a bad age to be able to retire considering that 37% of people plan to work until they’re either too old to work anymore or until they die.
But we’re better than that.
There are two levers to pull to reach financial independence – cutting expenses and making more money.
Five years ago I decided to simultaneously pull these levers in my own life because I wanted control over my life.
If you cut your expenses then the amount you are able to save goes up. And if you make more money then the amount you are able to save goes up.
But cut your expenses while you make more money and you’ll discover the amount of money you’re able to save explodes. You’ll reach your financial goals faster than you ever imagined.
Aaron and his family already live simply, frugally. Plus you can only cut so much. So they need to pull the other lever and make more money. That’s limitless.
He wrote, “I have nearly reached the plateau for my industry and geographical location, and unless I venture out into a new field, or embark on some work on the side, there seems to be no major changes in sight. My wife’s job, though quite stressful, is the most lucrative one she’s had.”
I dug into this a little deeper with Aaron and asked him if he’d ever strategically planned how to improve his job – growing and learning more, challenging himself, taking on more responsibility – and his salary, either at his current job or by finding another one.
He said, “I’m fairly certain that I have nearly reached the compensation plateau for both my industry here in North Carolina and at my company. I received a fairly large raise last September, but part of that was to entice me to stay longer.”
But then he told me two things that directly contradicted his theory about compensation. Can you spot them?
“Regarding your point on challenges and professional growth, I will be adding one or two more certifications to my growing list, both of which will benefit the company’s efforts moving forward. There is a lot of continuing education in my field and I am often studying and trying to better myself as an employee. I have taken on lots more responsibility at the office, which has eased the strain on the vice president.”
- He’s clearly demonstrating an increase in value to the company by adding professional certifications.
- And he’s taking on a lot more responsibility.
A top performer doesn’t miss an opportunity to tie those two things to an increase in compensation. Aaron deserves more, and if he chooses to stay in his current job he needs to have a conversation about his salary.
He needs to tell his manager that he’s open to staying but that together they need to figure out how he can keep being challenged, keep growing, and continue taking on more responsibility. And if his role is expanding then he wants his salary to be adjusted as well. That’s what top performers do.
Aaron might choose not to stay. He might choose to change careers. But can you change careers without taking a pay cut? No, you can’t. Here are the options:
1. Switch your career and take a pay cut. If you absolutely hate what you’re doing right now and can’t imagine spending the next 20 years of your life doing it then this might be the right option. Being an adult means realizing that money isn’t the sole metric for success. Adult life is about making difficult decisions about what you’re going to give up to be happy. The silver lining is that if you switch careers and are a top performer in your new field then the money will eventually follow.
2. Switch your career without a pay cut. Wait, I thought this couldn’t be done? I lied. You can do it but you have to do both careers at the same time during a transitionary period. The cost to do this is your time and sanity doing two careers simultaneously. You have to give up a lot of things – your friends, your relationship, taking trips, having fun – that’s the pay cut.
3. Take your existing job and get paid more. This is the easiest, fastest, and most lucrative option. You already have the job, you already spend eight hours a day there, and chances are that you haven’t strategically planned how to improve it and your salary. You need to be willing to put the work in to increase your value and get more responsibility. If you do that you’ll get paid more or you find a job that will.