Tis the season,
The holidays are always a time for reflection. As for me, I like to take this time of the year to review a career road map I have documented. One specific quote I read a while ago has stuck in my brain as I think about all that will be pursued throughout the next year.
“Most people live their lives chasing paychecks, pay raises and job security because of the emotions of desire and fear, not really them. It’s just like the picture of a donkey dragging a cart with its owner dangling a carrot just in front of its nose. The donkey’s owner may be going where he wants to, but the donkey is chasing an illusion.”
Have you asked yourself this same question? Are you chasing an illusion? Being busy working for the sake of work is not productivity. When is the end? Meaning, when can we stop working for someone else. Or, when can we stop making someone else wealthy and start making ourselves wealthy? What would it take to make a living from efforts of the past. This is what wealthy people do.
Wealthy people make money work for them as opposed to someone who hasn’t accumulated capitol. Sadly, if you are born into this world without money, you must spend the majority if your life working for money. This gives us limited options on how we spend our time and talents.
Don’t you want freedom? Don’t you want to wake up every day and do what excites you? We can have this life with a few re-allocations of priorities and the ability to delay gratification. I know this is true because I am almost there. I am finally starting to see the end goal. Specifically, when I can quit working for someone else and do what I want for the rest of my life. It has taken me nearly 32 years to achieve this feat. A little tip, I didn’t do this with a high income alone. I have become financially independent by mostly producing, saving and learning how money works. Today’s post is another lesson on how money works.
My last post in this series talks at a high level about the role Passive Income can play in generating wealth. Essentially, passive income is the primary player in the retirement game.
Why invest in the first place, I can just use my savings account
To a certain extent, yes you could just throw all your money in a shoe box under your mattress. There is a problem though. A thing called inflation and over time, it will eat your money. I plan to cover inflation in it’s entirety on a future post. But for now, just think of inflation as a cancer that eats your savings account at a 3% rate each year. The only way to defeat inflation is wealth generation. For today’s demonstration, our wealth generation vehicle will be investing in the stock market.
Mutual Funds 101
In this game of wealth generation, our vehicle of choice will be the mutual fund. Obviously, there is a plethora of investment vehicles available. But the traditional method I recommend getting familiar with first is the mutual fund. Why a mutual fund you say? Essentially, a mutual fund is an umbrella full of partial stocks from numerous companies thus giving you access to that fancy word, “diversification”.
The reason why diversification is such a good thing in the investment realm is that you are less likely to lose your entire portfolio when a recession hits. You see, since a mutual fund is spread across many different businesses, a dip in the market could hurt your portfolio, but you could also be protected by the more conservative stocks in the mutual fund.
With any investment, the more risk you take the higher the rewards. In my experience, most financial advisers recommend being a little riskier in your twenties to early thirties because you have time to rebuild your wealth should something catastrophic happen to your funds. With most investments there are three levels of risk,
- High risk
- Moderate risk
- Conservative risk
It’s up to you and your financial advisor to determine what level of risk best fits your situation.
I personally started investing in my late twenties and am on a relatively high-risk plan. But I do invest in mutual fund packages that have seasoned companies which have survived past recessions. Past performance is not a guarantee on future success, but can give you a vague baseline of measurement. As I transition to my mid-thirties I will scale things back to a moderate risk level. I also plan to diversify with Real Estate Investing in the coming years. I will be a little more aggressive in that realm since I am a little more comfortable in that world.
Update : See Real Estate Investing Category
While on the subject of risk, Please note, with this post, I am not advocating you follow my path. I am also not telling people to buy single stocks nor am I advocating we make any attempt at timing the market. Surely, someone out in the wild can make a case for these practices. But I personally only write about things I have experience with.
The difference between an investment and a gamble is that you actually understand how the investment works. Also, I invest for the long-term. I do not make a blind bet on some mutual fund package and hope for the best. Conversely, if your financial adviser doesn’t properly explain to you the investment tool they are using and how it works, don’t invest. I repeat. Do not invest in anything you don’t understand.
So what is the 4% rule?
Essentially, the 4% retirement rule just means you live off of 4% of the income produced by your retirement fund. The rest of the money you receive from your retirement fund goes back into the investments to ensure your fund grows so you don’t outlive your income.
Using the chart below,
It would be tough, but I could retire with $700,000 in my retirement fund. This is because I have my home paid for, and no debts. As of now, my family only needs $27,000 per year to survive.
If my $700,000 investments render 10% return on investment (ROI), My retirement account will pay me $70,000 every year. Since I only need $27,000 to survive, I will then add the remaining $43,000 back into the retirement fund to grow and reduce the chance of me outliving my money.
Disclaimer: Theory is different than real-world application. I may only receive an 8% ROI on my investments. That small difference changes everything. I have purposely not recommended any specific retirement accounts, because I am not an expert in this field. I am just proficient at doing a “google” search for a investment calculator and sharing that information with you. Please consult a professional, and be relentless with your retirement planning. But in all reality, my investments will most likely render a 3-5% ROI. As get closer to retirement, I’ll be more conservative with my portfolio.
When can I retire?
My end date is not quite $700,000. I am not sure exactly where I fall at this moment in time. But be aware, most sophisticated analysts claim your retirement using the 4% rule will last for 30 years. So, if I retire at 40, that means I will outlive my retirement nest egg at 70. So I have a backup plan.
When I decide to “retire” I plan to earn income from side jobs. I will also operate a small Real Estate business to help me fight inflation (more on that in the coming days). The difference is, this work will be part-time. In addition, I would like to retire early so I can spend the healthy years of my life volunteering for philanthropic causes. I’d rather have my mind focused on causing change rather than worrying about outliving my income.
My Personal Motivation Behind Early Retirement
Just so you know, America’s first diplomat Ben Franklin was a machine. This man wore many hats and his past accomplishments still affect our lives today. Here is a list of things Ben did after 42, which was the age he retired. By 1748 Franklin had “retired” from printing to concentrate on his scientific pursuits, while maintaining a financial interest in the business with his new partner, David Hall. Instead, Franklin found himself increasingly involved in civic affairs. In 1751 he was elected to the Pennsylvania Assembly and in 1753 he became deputy British postmaster of North America. As colonial relations with Great Britain grew strained, Franklin represented first the province of Pennsylvania, and eventually all of the colonies, as a diplomat in London after 1757. By the time he returned to Philadelphia, the American Revolution had all but begun. (oh yeah he created indoor electricity and a freaking stove too!)
Bonus: 10 least expensive states to live in the U.S. (I currently live in Indiana number 5 on the list. I can attest, it’s super affordable here. As mentioned earlier, by owning all my possessions and leveraging public transportation I could get by comfortably with only having 700k rendering me $28,000 per year. How cool eh? Depending on your situation, a move may also help you retire early.)
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