Tuesday, September 29, 2015

Meet Joe

A million dollars.

That's what most people earn throughout their lifetime. But like sand running through their fingers, most of them struggle to contain this fleeting resource. 

Nobody thinks about it this way, but an average person earning a salary of $2,100 a month would have grossed $1,008,000 after 40 years of work. That's based on a conservative, and highly
unrealistic assumption that this person has not gotten a raise in over 40 years.

Let's call this person Joe.

Now, if Joe saved half of his income every month, he would have $504,000 sitting in the bank (or under the mattress) at the point of retirement. That's not a million dollars, but it's definitely a sizeable sum of money. Again, Joe arrived at that figure based on a conservative, and highly unrealistic assumption that he does not invest his money in any form.

Here's the thing, you're not average. 

I'd like to believe that if you're reading this blog right now, you are no Joe. Perhaps, you earn more than him, have some form of tertiary education and will get pay raises in your lifetime. 

Let's push it even further; you understand the eight wonder of the world - the power of compound interest and the advantage of leveraging. 

You should be able to do much better. 

If Joe is able to have a net worth of $504,000 at around 60 years old...

There's no excuse that you, in your fancy clothes and spacious cubicles, can't achieve the same in a shorter time span. 

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  1. I think an emphasis deserves to be applied to the importance of ones savings rate when it comes to wealth building, especially at an accelerated rate.

    Let's compare to Joe's side by side. Let's assume they both make $100K year and never get a raise. And lastly that they both have an effective tax rate of 25% (just to keep things simple).

    Joe # 1 saves 50% of his after tax income and earns a 3% compound rate of return over 20 years.

    Joe #2 saves 15% of his after tax income and earns a 8% rate of return over 20 years.

    At the end of 20 years Joe #1 has accumulated $1,007,639 vs that of Joe #2 at $514,822.

    Joe #2 would need to earn a compounded return of approximately 14% in order to match the results of an aggressive saver.

    In the world of wealth building, your savings rate should be priority #1.


    1. That's a brilliant example Dom...our savings rate is a game changer in the mid-long run. Thanks for illustrating it with some concrete figures.

  2. Awesome blog, love it!

    I feel that what this article misses is optimising expenses. One can achieve a great saving rate but if that person does not rein in on expenses, there's no way that person can ever retire because there's never enough savings.

    1. Thanks Mickey J. I tried to digest your comment about reining in on expenses..I do agree but isn't a high savings rate a result of optimizing expenses.

      E.g if Joe lived on 500,000 for 40 years...he should be able to live off his savings of 500,000 for another 30 years (taking into account some inflation and unexpected costs - medical, etc). Of course, he'd do much better if he invested that sum of money.

  3. We are currently at 50%+ with 401k contributions. Limited with high incomes but having to have daycare for 2 kids.

    Used to save a lot less though. Was thrilled with getting the match only for my 401k.

    1. 50% with daycare for 2 kids? Wow, u guys are rocking the savings rate!

  4. Joe's key to success was a decision not to adopt a lifestyle and philosophy of spending all that he earned, continuously and regardless of income gains, for 40 years. Unfortunately, few seem to follow Joe's example, though perhaps unconsciously. You're right: it's easy to save enough for financial freedom and a secure retirement, but only if we adopt Joe's core approach: make saving, not lifestyle inflation, our #1 priority!

    1. I wholeheartedly agree. Joe was a great saver...and prioritized savings over lifestyle inflation. However, the point of the post is not to emulate Joe but to do even better than him.

      I believe most of us are in a better position than Joe.