Tag: financial freedom

  • A Reminder About the Intersection of Money and Life

    A Reminder About the Intersection of Money and Life

    By now, you should know that I love Chicago.

    It’s where I’m from, where I’ve chosen to raise my family, and where I primarily invest in real estate.

    Last night was a good night for Chicago sports fans.

    My favorite team, the Chicago Cubs, won a playoff series for the first time since 2017.

    While watching the game at home, I couldn’t help but think of how different my life is today than it was in 2017.

    Back then, I had season tickets and rarely missed a game. My wife and I were just about to get married. Life was good and about as easy as can be.

    From a financial perspective, we were pretty boring.

    By the way, being boring with money is not a bad thing.

    When it comes to money, boring is good.

    Back in 2017, my wife and I each made good incomes as attorneys. More importantly, we were happy saving a lot of the money we earned.

    We rented an apartment and had minimal expenses besides travel and our social lives.

    At that time, we had a good amount of savings because we were planning to buy a house after the wedding.

    Our only investments were in retirement accounts, like a Roth IRA and 401(k). We didn’t own any real estate.

    Life’s a bit different for me now.

    I don’t have season tickets anymore. We don’t travel as much.

    We have three kids and different financial priorities.

    Life is better than ever, but maybe not as easy as it was in 2017.

    OK, what does all this have to do with baseball?

    Last night at home, while watching the Cubs pull out a stressful victory, I started thinking about these things. I wasn’t in the crowd like in 2017, but I knew exactly how the fans were feeling.

    Each pitch was tense. The crowd went nuts after every Cubs hit or strikeout by a Cubs pitcher. Whenever the San Diego Padres had a rally going, every Cubs fan was nervous.

    In the end, the Cubs pulled out the victory and thousands of people now have memories they’ll never forget.

    There’s nothing better than playoff baseball. I love it and hate it at the same time.

    Watching the game, I thought of some of my favorite baseball memories. It was a good reminder of why it’s so important to think and talk about money.

    We say it a lot around here: money is only a tool. When used properly, you can use money to build lifelong memories. You can create stories that you’ll remember for the rest of your life.

    Stories like the ones I have from 2016 when the Cubs won the World Series.

    That’s when I met Phil and April.

    My nice friends, Phil and April.

    Throughout that World Series run, we sat next to the nicest couple in the world, Phil and April.

    Phil was a diehard Cubs fan. April was more reserved.

    Both were smart and very friendly. They were enjoyable people to sit with.

    We chatted baseball, mostly. Pitching changes. Send the runner. Question the manager. That sort of thing. Completely normal, unremarkable stuff. 

    Until Game 5.

    Game 5 was played on a crisp, October evening. Jackets and beanies weather in Chicago. Phil and April were sitting next to my brother and I, as usual.

    Mike Napoli was playing first base for Cleveland. Around the 3rd inning, a jerk four rows in front of us taunted Napoli with a crude, juvenile insult.

    It was apparent the jerk was doing his part to keep Old Style in business for another year.

    None of us liked what this jerk yelled.

    Phil especially didn’t like it.

    Phil was nice…and tough.

    Phil did what the rest of us were thinking but were too scared to do ourselves.

    Phil stood up. In so many words, Phil sternly recommended that the jerk knock it off and show some class.

    The jerk turned around, aggressively scanning the crowd for the man who had publicly shamed him. The jerk had that unmistakable look in his eye that meant, “Let’s dance.”

    My brother and I were a bit worried for our nice… and all of a sudden tough…friend, Phil. 

    Phil’s wife, April, did not look worried. She sat there like nothing strange was happening. Almost like she had seen this movie before.

    When the jerk locked eyes with Phil, he immediately saw that Phil was not backing down. If anything, Phil looked a little too eager.

    Well, the jerk was sloppy, but he had enough sense to recognize that he wanted no piece of Phil. He wisely turned back around and sat down quietly. 

    That was the last we heard from the jerk that night.

    Our nice (and tough) friend, Phil had restored order.

    chicago cubs sing lit up reminding me of why we spend money.
    Photo by Dastan Eraliev on Unsplash

    Phil’s on TV!

    On the day of the Cubs’ championship parade, my brother called me excitedly, “Phil’s on TV! Phil’s on TV!”

    It didn’t register right away who he was talking about.

    When I turned on the TV, sure enough, there was Phil, our World Series friend. I was so confused. Phil was giving an interview on set with the Cubs announcers.

    Our nice (and tough) friend, Phil? On TV? 

    I turned up the volume and listened to Phil talk about his experience watching the Cubs win the World Series. Maybe I was hoping he’d mention his nice friend, Matt. (He didn’t.)

    I still couldn’t figure out why Phil was on TV. 

    Why won’t they just put his name on the screen already!? 

    It wasn’t until the end of the interview that I learned who Phil was.

    All I could do was laugh. 

    Our nice, and confirmed tough, friend Phil is better known as World Wresting Entertainment (WWE) champion and icon, CM Punk.

    Oh, and his wife?

    WWE champion and bestselling author, AJ Mendez.

    Unknowing watching the Cubs win the World Series with two celebrities with a combined 3.5 million Instagram followers?

    Yup, that’s a story I’ll be telling for a while.

    A memory I wouldn’t trade for anything. 

    As much fun as the World Series was, my favorite Cubs memory actually took place during the 2015 season, the year before they won the World Series.

    It was during the 7th inning of Game 4 of the NLDS. This was the game where the Cubs knocked the rival St. Louis Cardinals out of the playoffs.

    In the 7th inning, with the Cubs up 5-4, Kyle Schwarber hit one of the most epic home runs in Cubs history, landing his moonshot on top of the new right field video board.

    It was such a feat, the ball is now enshrined where it landed.

    The entire stadium was rocking so loud, you could feel the ground shaking beneath your feet. Every fan was jumping up and down, hugging anyone close enough to touch.

    We were all dancing like nobody was watching. That moment was pure happiness. 

    I was there with my mom.

    A lifelong Chicagoan, she too was jumping up and down and high-fiving all the other diehard fans in our section.

    After the game, we met up with my wife at a restaurant and relived the victory over Champagne.

    That day with my mom and my future wife is one of the best memories I have.

    clear wine glass holding champagne, one of the best memories I have with my mom and spent money on.
    Photo by Oliver Sherwin on Unsplash

    What does this have to do with money?

    What does any of this have to do with money?

    When I say money is a tool to create stories and memories, this is what I mean.

    My brother and I still joke about our nice friends, Phil and April. I wouldn’t trade that memory with my mom for anything.

    These are the types of experiences that I want more of.

    These memories, and the desire for more like them, continue to motivate me today.

    I want to be good with money, not so I can stash it in the bank, but so I can use that money to create joy for me and my family.

    Beyond that, watching the crowd at Wrigley Field last night reminded me of why I started a personal finance blog.

    It excites me to try and help people make intentional money decisions for meaningful experiences with meaningful people.

    Talking money is really just talking life.

    You may not be a baseball fan, but this conversation illustrates a foundational concept of Think and Talk Money.

    Yes, we discuss money.

    But, we’re really talking about our lives and our experiences.

    Money is just a tool to help us. 

    And before you get cynical on me, of course money is not required for good experiences. That’s not the point.

    What I’m suggesting is that if we’re all spending so much of our time each week at work, shouldn’t we spend some time thinking about the money we earn so we can maximize experiences like I had with my mom? 

    Think and Talk Money is all about awakening that thought process so we can use the tool of money to fuel meaningful lives.

    You might not use that tool to get Cubs tickets.

    But, what if you started thinking about money as just a currency that you trade to get your time back so you can do more of what you want with who you want?

    Whatever it is that you’re after in life, thinking and talking about money will help get you there.

    Have you used money as a tool recently to create stories and memories?

    Let us know in the comments below.

  • How Does Your Net Worth Compare to People Your Age?

    How Does Your Net Worth Compare to People Your Age?

    Pop quiz!

    What is your net worth?

    Kudos to you if you can answer that question quickly and relatively accurately.

    Knowing your net worth indicates you are likely making intentional choices with your money. You likely are more concerned with how much money you keep, not how much you make.

    It also likely means that you have a plan and are well on your way to financial independence.

    Well done!

    If you know your net worth, you might be wondering how you measure up to people your age.

    That’s what we’re going to look at today.

    First, let’s discuss why it’s important for all of us to track our net worth.

    Why is it important to track your net worth?

    By tracking your net worth, you can quickly see if you are making good money decisions or need to make adjustments.

    I recommend everybody, no matter where you are in your financial journey, track your net worth.

    By the way, tracking your net worth is not a major time commitment.

    It takes me less than 30 minutes each month to track and discuss what I consider to be one of the most important metrics in personal finance.

    That’s all the time it takes to know if I am progressing towards my most important financial goals.

    If you don’t know your net worth, now is the time to start tracking it.

    For a step-by-step guide to tracking your net worth, check out my post here:

    Why You Need to Track Your Net Worth Every Month

    Just like budgeting with two simple numbers, tracking your net worth is the best, and easiest, way to measure your money progress. 

    There’s no better way to learn how much money you’re keeping after a month of making money.

    Think of tracking your net worth in terms of keeping score during a basketball game.

    If you don’t know the score of the game, you don’t know if your strategy is working. You don’t know if you need to make adjustments before time runs out.

    The same applies to tracking your next worth. The point is to educate yourself on your current financial situation so you can make adjustments while there is still time.

    How do I know if I need to make adjustments based on my net worth?

    Speaking of making adjustments, it can sometimes be helpful to look at datasets to see how you measure up to the rest of the population.

    So today, we’ll look at two potentially helpfully net worth metrics.

    First, we’ll look at the average net worth of Americans by age.

    Then, we’ll look at the average net worth by age of the Top 1%.

    The goal is to give you some benchmarks so you can assess where you’re currently at. Then, you can decide if you want to make any adjustments.

    In other words, the point is to educate yourself so you can make intentional choices for your own situation. The point is not to start comparing yourself to your neighbors.

    OK, let’s get to it.

    green plant in clear glass cup indicating that net worth grows over time.
    Photo by micheile henderson on Unsplash

    What is the net worth of Americans by age?

    Below is the average and median net worth of Americans by age based on research from Empower.

    Keep in mind these studies are not perfect.

    It’s not an easy task to track and study net worth across a wide population. Not everyone tracks her net worth, let alone makes it easy for outsiders to track it.

    Use these figures as a rough guide to help your own decision-making. Just don’t get too caught up in the exact figures.

    Net Worth by Age


    Age    		Average Net WorthMedian Net Worth
    20s$121,004$6,609
    30s$307,343$24,247
    40s$743,456$75,719
    50s$1,330,746$191,857
    60s$1,547,378$290,447
    70s$1,444,413$233,085
    80s$1,342,656$233,436
    90s$1,212,583$205,043

    High school math refresher: The average is calculated by adding up all values in a dataset and dividing by the count. The median is the middle value of a dataset with an equal number of values above and below. Averages can be skewed by extreme values, so the median can give you a more accurate picture.

    Here are some observations about the average net worth of American by age:

    • Net worth tends to increase with age. No surprise there, right? As our careers progress, we tend to earn more and invest more money.
    • Net worth tends to peak in our 60s. This also makes sense. When people reach retirement age, they start to draw down their portfolio. They’ve spent decades accumulating wealth and eventually it’s time to spend that savings.
    • Notice the effects of compound interest. From the 20s to the 30s, we see that the median net worth nearly quadruples. That’s a 400% increase! However, it equates to a median net worth increase of only $18,000.
    • Compare that to the change from the 50s to 60s. We see that the median net worth increases by only 50%, but the result is an increase in nearly $100,000.
    • The takeaway is that when you have more money invested, smaller gains result in higher earnings. You could say, “the rich get richer.”

    What is the net worth by age of the top 1%?

    Next, let’s take a look at the average net worth by age of the Top 1%, thanks to an analysis of Federal Reserve data by DQYDJ.

    Remember, these are only rough figures. Use this data to help you strategize based on your current financial situation.

    Net Worth by Age of the Top 1%

    AgeTop 1% Net Worth
    18-24$653,224
    25-29$2,121,910
    30-34$2,636,882
    35-39$4,741,320
    40-44$7,835,420
    45-49$8,701,500
    50-54$13,231,940
    55-59$15,371,684
    60-64$17,869,960
    65-69$22,102,660
    70-74$18,761,580
    75-79$19,868,894
    80+$16,229,800

    Are these dollar amounts lower or higher than you expected?

    If these dollar amounts seem unattainable, remember that 99% of us will never hit these marks. Don’t get discouraged. You’re doing great work if you’re anywhere close to these numbers.

    Did you notice that the trends in the Top 1% net worth data are very similar to the average net worth by age data we previously looked at?

    We again see the net worth of the Top 1% peaking in the 60s.

    We also see the same effects of compound interest.

    This data reinforces the point that investing favors people who start early, even if the results do not materialize for decades. It takes time for compound interest to work its magic.

    young man and older man standing at bottom of stairs representing the importance of tracking your net worth.
    Photo by John Moeses Bauan on Unsplash

    Tracking your net worth is the best way to measure your personal financial progress.

    By now, you should have an idea of where you stand compared to the rest of the population.

    What can you do with this information?

    If you’re happy with how you measure up, that might mean you’ve reached a level of financial independence where you have options in life.

    Having options in life means that you’ve achieved the ultimate goal: FIPE (Financial Independence, Pivot Early).

    When you reach FIPE, you are free to pivot to a new challenge, if that’s what you want.

    On the other hand, maybe you looked at this data and learned that you are not as far along on your financial journey as you had hoped.

    Don’t panic.

    The benefit is that you can now make adjustments.

    What kind of adjustments can you make after learning your net worth?

    When you track and study your net worth, you can make adjustments while you still have time on your side.

    For example, you may decide that it’s finally time to boost your saving rate.

    After all, your saving rate is the one thing you can actually control on your way to financial independence.

    Or, you might take a fresh look at your Budget After Thinking to find ways to generate more fuel for your investments.

    And, it might mean saving and investing that one-time windfall instead of spending it on stuff you don’t really care about.

    Whatever decisions you make, knowing the average net worth by age can help point you in the right direction.

    It takes me less than 30 minutes per month to track my net worth.

    It takes me less than 30 minutes each month to track and study one of the most important numbers in personal finance.

    Each month, I’m only looking for progress compared to what my net worth was previously. 

    If my net worth increases over time, it means I am heading in the right direction.

    It means that I am continuing to fuel my Later Money goals. I am paying down debt. I’m letting my investments do their thing.

    If my net worth is not increasing, it means I need to figure out why and consider making adjustments. 

    Sometimes my net worth decreases because the markets are heading down. If that’s the case, I don’t do anything. At this stage in my life, I can afford to wait while markets tick back up.

    If the issue is that my debt is increasing, or I didn’t fuel my investments that month, I know I need to make adjustments. 

    By studying my net worth each month, I can catch these setbacks before they become a continuous problem.

    Do you track your net worth?

    Are you happy with how you measure up?

    If not, are you prepared to make the necessary adjustments?

  • How Much Money Did You Actually Keep This Week?

    How Much Money Did You Actually Keep This Week?

    The alarm clock goes off at 6:30 a.m.

    You groggily brush your teeth and hop in the shower.

    The hot water feels nice. Should I skip work today?

    Then, reality sets in. What time is my first meeting today?

    Shower done. Now, what to wear? The blue shirt? Again?

    Let’s go, let’s go! Pick up the pace! The kids need to get dressed and eat breakfast.

    Why are we always so rushed before school? Tomorrow, I’ll wake up earlier.

    The train will be here in 10 minutes. “Bye kids! Bye Honey!”

    I gotta get across the tracks! Speed walk!

    Phew. Made it.

    30 minutes to catch your breath before work starts.

    What day is it today? Tuesday?? It’s only Tuesday?!?!

    I’m tired.

    Do you ever notice the people on the train?

    Does this routine sound familiar to anyone?

    At least you’ll have something to show for it come pay day.

    Wait, you go through all that effort every day and you’re not saving a good portion of your paycheck?

    Let’s talk about that.

    When I take the train downtown, I can’t help but notice my fellow passengers.

    Some people are already cranking away on their laptops. Some are even on conference calls, which always surprises me.

    Why don’t they care that everyone is annoyed with them? Do the other people on the call know that they’re talking to someone on a train?

    But, I digress.

    Some passengers are reading books. A good portion of passengers are doomscrolling. Just about everyone has headphones in.

    It’s not that people look unhappy. They just seem to want to be somewhere else.

    Do you have similar observations?

    Most people don’t have a plan.

    It’s at times like these when I start to wonder how many of these people have a plan.

    I’m not talking about a plan for lunch or for getting to the gym after work.

    I mean a plan for how to spend their time and their money.

    Ideally, this plan would be based upon spending time on meaningful pursuits with meaningful people.

    My guess is most people have never really thought about this kind of plan.

    Instead, it’s go to work. Get a paycheck. Pay the bills.

    Same thing tomorrow. That’s as far as the plan goes.

    This routine may be enough for some, or even most, people. If that’s enough for you, there’s no shame in it. Holding down a steady job and providing for your family are accomplishments to be proud of you.

    But, let’s be real.

    You’re reading a personal finance blog.

    We spend a lot of time talking about financial freedom and creating options.

    You wouldn’t still be reading if you didn’t feel there was more to life than the daily train ride, right?

    You may not know how or when to get off the train, but you’re interested in finding out if it’s possible.

    Well, it’s definitely possible. But, you need to break the cycle and commit to a plan.

    Here’s a question to help you get started.

    How many hours do you work to make money?

    Wide view image of blank black spiral note pad and white marker with calligraphic inscription plan on yellow background meaning we all need a plan to keep our money.
    Photo by Volodymyr Hryshchenko on Unsplash

    Let’s say you work 2,000 hours per year to make money (40 hours per week, 50 weeks per year). 

    We won’t even count all the hours you spend getting dressed and riding the train.

    Also, we will pretend you’re not looking at your emails in the evening, on weekends, and on family vacations. 

    We definitely won’t count the hours you’re staring at the ceiling fan worried about tomorrow’s challenges at work.

    OK, so you’re working 2,000 hours (plus) per year to make money.

    My question is:

    How many hours per year do you think about what to do with that money?

    Let that sink in for a moment.

    You work a lot of hours. I’m guessing many of those hours are stressful.

    Yes, you get paid money in exchange for those hours.

    But, do you still have any of that money?

    Do you care more about making money or keeping money?

    Think back on how much time, energy, and sacrifice you dedicated to making that money.

    Hopefully, you saved and invested a good portion of that money.

    The problem is that most lawyers and professionals work incredibly hard, make good money, and don’t keep enough of it.

    They somehow find 2,000 or 3,000 hours per year to work.

    But, they won’t set aside even a few hours per month to think about what to do with all that money.

    This is why I am passionate about money wellness.

    Most people spend the vast majority of their lives worried about making money and practically no time at all thinking about what to do with that money.

    No, I’m not suggesting that you need to think about money for 2,000 hours per year.

    What I am suggesting is that even a little bit of time each week spent thinking and talking about money is just as important as the time you spent earning it.

    That’s how you break the cycle of mindlessly riding the train to work and start progressing towards financial freedom.

    It’s not how much money you make. What matters is how much you keep.

    Robert Kiyosaki put it best in Rich Dad Poor Dad, “It’s not how much money you make. It’s how much money you keep.”

    If you knew someone who made $1,000,000 per year, and at the end of the year, had only saved $20,000, what would your reaction be?

    Sadly, this is how most people behave with their money.

    They inherently know that they should be saving more, but they come up with excuses. They assure themselves that they’ll start saving more next year.

    On the other hand, what if you knew someone who made $100,000 per year and saved $40,000?

    Did your reaction change?

    This is the kind of person who will actually achieve financial freedom and have choices in life.

    It all comes down to how much you keep, not how much you make.

    It’s why your personal saving rate is so important.

    Don’t forget, your saving rate is the one thing you can truly control.

    Bambu eco toothbrush in a glass bottle symbolizing the morning rush to get out of the house.
    Photo by Superkitina on Unsplash

    What is a saving rate?

    Your saving rate is simply the amount of money you save each month divided by the amount of money you make.

    Saving rate = Money Saved / Money Earned

    Just like staying on budget with two simple numbers, you can monitor your progress with this simple formula.

    I find it helpful to measure your saving rate based on your monthly income and savings. This way it matches up with your Budget After Thinking. 

    Tracking your saving rate will help you understand if you are making progress over time. 

    It’s not about comparing yourself to someone else. Whatever your current saving rate is, the goal is to seek personal improvement. 

    Just like with tracking your net worth, the purpose is to see if you are making personal progress over time.

    How can you make progress with your saving rate over time?

    When it comes down to it, there are really only two ways to improve your saving rate.

    1. You can spend less, and save more, of the money you’re currently making.
    2. You can make more money and save most of that money, all while keeping your expenses the same.

    Combining those two ideas is even better: make more money, spend about the same. 

    Use the excess money you make to fuel your Later Money goals.

    If you can do that, your saving rate and your net worth will steadily climb.

    You’ll realize that you’re closer to getting off the train than you think.

    How much money did you keep this week?

    When you get your next paycheck, pay attention to how much of that money you actually keep.

    Once you pay the mortgage/rent, car payment, and credit card bills, is there anything left for you?

    If your saving rate is low, this exercise should make you mad.

    Seeing 95% of your hard-earned money disappear as soon as it comes in should inspire you to make some adjustments.

    Those adjustments may be small at first. Over time, you’ll experience that it feels better to keep money than to spend money.

    Keeping money leads to options.

    Spending money leads back to the train.

    Have you ever observed your fellow commuters in the morning? What are your takeaways?

    Do you have a plan to get off the train, should that be your choice?

    Let us know in the comments below.

  • Your Saving Rate is the One Thing You Can Truly Control

    Your Saving Rate is the One Thing You Can Truly Control

    On your journey to financial freedom, there is only so much you can control.

    The reality is, like most things in life, much of our financial journey is out of our hands.

    If your gut reaction is that I’m wrong about that, that’s OK. I get it. I used to be in denial, too.

    Really smart people, like Think and Talk Money readers, don’t want to acknowledge that they aren’t in complete control of their financial lives.

    To illustrate my point, here are just a few things that you can’t control on your way to financial freedom:

    1. You can’t control the returns you’re going to get in the stock market. It’s reasonable to project 10% average annual returns based on historical performance. Also, we use 10% merely as a projection for planning purposes. But, there’s no guarantee anybody will earn 10% per year.
    2. You can’t control whether a real estate investment appreciates. We all certainly hope our properties increase in value over time. We do our best to target areas where appreciation is likely. But, once again, there’s no guarantee.
    3. You can’t control if your employer is going to give you a raise. Of course, you can work hard. Also, you can outperform all the metrics. You can go above and beyond to deliver massive value to your company. However, when it’s time for your annual salary review, it’s not up to you how much all that is worth.

    So, am I wrong about any of that?

    Gee, thanks for the doom and gloom, Matt.

    I know, I know. Not what you want to hear.

    Don’t be discouraged. All is not lost.

    There is one crucial element that you can control on your way to financial freedom.

    Today, we’ll focus on the one crucial element that you actually can control on your way to financial freedom.

    It’s such an important concept that Mr. Money Mustache’s blog post from years ago is still a classic: The Shockingly Simple Math Behind Early Retirement.

    Even more so, it’s such a powerful concept that you won’t find a personal finance blog, book or podcast that doesn’t emphasize its importance.

    What is the secret?

    What is the one thing you can control above all else?

    The one thing you can truly control is your saving rate.

    If you ignore every piece of investment advice out there and focus on your saving rate, you are going to be in great shape.

    Let’s examine why.

    What is a saving rate?

    Your saving rate is simply the amount of money you save each month divided by the amount of money you make.

    Saving rate = Money Saved / Money Earned

    Just like staying on budget with two simple numbers, you can monitor your progress with this simple formula.

    I find it helpful to measure your saving rate based on your monthly income and savings. This way it matches up with your Budget After Thinking. 

    I also find it most useful to express your saving rate as a percentage. To see your saving rate percentage, all you need to do is multiply your saving rate by 100.

    Saving rate % = (Money Saved / Money Earned) x 100

    Moving forward, when I refer to saving rate, I will be talking about your saving rate percentage. It’s more informative to see what percentage of your money you are saving, rather than an amount with no context.

    What I mean is this: if someone asked me if saving $10,000 per year was a good target, I wouldn’t be able to comment with more context. 

    If that person was making $75,000 per year, I would say that seems OK. That’s a saving rate of more than 13%.

    On the other hand, if someone told me they were making $750,000 per year, and only saving $10,000, I would recommend that person revisit their Budget After Thinking.

    That’s a saving rate percentage of only 1.3%.

    That’s… bad.

    Flying back from Half Moon Bay, California to San Jose I captured this moment as we were descending over the Silicon Valley representing what we can control in life like our saving rate.
    Photo by Chris Leipelt on Unsplash

    What can I learn from tracking my saving rate?

    Tracking your saving rate will help you understand if you are making progress over time. It’s not about comparing yourself to someone else.

    Whatever your current saving rate is, the goal is to seek personal improvement. Just like with tracking your net worth, the purpose is to see if you are making personal progress over time.

    When it comes down to it, there are really only two ways to improve your saving rate.

    1. You can spend less, and save more, of the money you’re currently making.
    2. You can make more money and save most of that money, all while keeping your expenses the same.

    Combining those two ideas is even better. Like we just said, make more money, spend about the same. 

    Use the excess money you make to fuel your Later Money goals.

    If you can do that, your saving rate and your net worth will steadily climb. You’ll experience that your Later Money goals are closer to becoming reality than you think.

    Why it’s important to focus what you can control, like your saving rate.

    My point here is show you how dramatically one decision can accelerate your progress towards your goals.

    Each additional amount saved is one step closer to financial freedom.

    Sometimes, we all need to ask ourselves:

    “Is spending more money right now on things I don’t really care about going to make me happier?”

    “Do I even want to go out to more restaurants? Or fancier restaurants?”

    “Do I despise my home/my car/my wardrobe so much that I must replace it immediately?”

    Only you can answer these questions. 

    Maybe you’ll realize that your life is pretty good right now as it is.

    You might just decide that you don’t need the extra money at this moment. 

    You’d rather use the money as fuel for what you really want in life.

    Here’s an example showing the importance of your saving rate.

    Scott Trench, author of one of my favorite money wellness books, Set for Life, is a big advocate of improving your saving rate.

    In a recent episode of his BiggerPockets Money podcast, Trench emphasized just how important your saving rate is using a simple example.

    Let’s use that example to explore how improving your saving rate can accelerate your journey to financial freedom.

    Assume that you earn $100,000 per year (after taxes for simplicity).

    You are a pretty good saver and save 20% of your income, or $20,000. For most people, targeting a saving rate of 20% is pretty solid.

    Of course, if you save 20% of your income, that means you spend 80% of your income, or $80,000 per year:

    • Take Home Pay: $100,000
    • Annual Spending: $80,000
    • Annual Savings: $20,000

    Based on the above, we can project how long you will have to work to fund one year of your life.

    Because you spend $80,000 per year and you save $20,000 per year, you would have to work four years to save enough money to fund one year of your lifestyle:

    $20,000 saved x 4 years = $80,000 saved (1 year of spending)

    In other words, you would need to work four years to buy one year of financial freedom.

    Not bad, huh?

    But, look what happens when you improve your saving rate.

    a woman sitting a desk with a a laptop computer representing what we can control in life like our saving rate.
    Photo by Alexandr Podvalny on Unsplash

    What happens if you double your saving rate from 20% to 40%?

    Now, let’s see what happens if you double your saving rate to 40%. That means you are saving $40,000 per year and only spending $60,000 per year.

    The result is that you now only need 1.5 years of work to fund one year of financial freedom:

    $40,000 saved x 1.5 years = $60,000 saved (1 year of spending)

    Notice that two things are happening at the same time when you increase your saving rate.

    First, you are saving more money each year. That’s a good thing.

    Second, you are spending less money each year. That’s another good thing.

    The result is that when you spend less money, you need to accumulate less money to fund your lifestyle.

    It’s a double whammy. In a good way.

    Should we complete our example by taking it one step further?

    Let’s say you have a 50% saving rate. That means you save $50,000 per year and spend $50,000 per year.

    How long do you have to work to buy one year of financial freedom?

    Only one year.

    $50,000 saved x 1 year = $50,000 saved (1 year of spending).

    Now, that’s cool.

    It’s motivating to think of your saving rate in terms of years to financial freedom.

    So, what’s the takeaway here?

    It can be extremely motivating to think of your saving rate in terms of how long you have to work until financial freedom.

    Each incremental amount that you save means you’re boosting your savings at the same time you’re reducing your spending.

    When you pull both of those levers at the same time, you accelerate your progress towards financial freedom.

    This thought process is especially helpful for people who feel that math is not their thing. It doesn’t get much simpler than viewing savings in terms of buying financial freedom.

    The cool part is that once you hit a 50% saving rate, you can essentially buy a year of financial freedom for every year that year work.

    Keep in mind that that this simple illustration ignores any investment returns you may get from your savings.

    Don’t worry, those investment returns will generally reduce the length of time you need to work even more. Check out Mr. Money Mustache’s post for more on that point.

    Setting aside investment returns, the purpose here is to drive home the point that the more you save, the faster you’ll reach financial freedom.

    That’s why it’s so important to focus on your saving rate. You can’t control everything, but you can certainly work on your saving and spending.

    Have you ever calculated your saving rate in terms of how quickly you can achieve financial freedom?

    Does this example motivate you to save even more?

    Let us know in the comments below.

  • Did You Win the $1.787 Billion Powerball Jackpot!?

    Did You Win the $1.787 Billion Powerball Jackpot!?

    No!?

    Me neither.

    It looks like there are two winners, one from Texas and one from Missouri, who will split the massive payout.

    It’s simply an astonishing amount of money. Congratulations to the winners!

    I can’t be the only one thinking that money like that could easily be a blessing and a curse, right?

    Hopefully, the winners take their time and come up with a plan to not only make sure the money lasts, but that they use it in a meaningful way.

    Well, just because we didn’t win doesn’t mean we can’t take advantage of this opportunity.

    In the spirit of the massive jackpot, I started thinking about what I would do in a more realistic scenario.

    Specifically, I asked myself:

    What would I do if I woke up tomorrow with $178,000 in my checking account?

    I know it’s not as exciting as thinking about what you would do with $1 billion, but I think it’s more important because it is actually realistic.

    Yes, I said realistic.

    I truly believe that if you are a high-earning professional, like a lawyer, consultant, or real estate investor, it will happen.

    There will come a point in your career (hopefully multiple points) where you earn a one-time windfall of $178,000.

    For example, it may come in the form of a bonus, a commission, or profits from a sale.

    When that time comes in your life, you want to be ready.

    The last thing you want to do is waste that golden opportunity. You may never get another chance to materially impact your life so much in one shot.

    So, let’s have some fun and plan out what we would do if we wake up tomorrow with an extra $178,000 in our bank accounts.

    Here’s exactly what I would do.

    The first thing I would do with $178,000 is pay off high interest debt.

    I think of a bonus like this as a one-time “Get Out of Jail Free” card.

    With $178,000, the first thing I would do is pay off any high interest debt that I have. High interest debt includes credit card debt, personal loans, and any lines of credit.

    My main financial goal this year was to pay off the rest of the HELOC we used to buy our last rental property. That’s my first move with this windfall.

    Once the debt is eliminated, I’ll be free to pursue more fun life goals. And, I’ll feel better without having that debt hanging over my head.

    slot machines in a casino on the Las Vegas Strip, Nevada which is not the best way to plan your financial future but is a good way to think about what you would do with a windfall.
    Photo by Steve Sawusch on Unsplash

    Next, I would set aside $15,000 to $20,000 for fun money.

    I would use about 10% of the money for fun right now. That comes out to approximately $15,000 to $20,000.

    That is the equivalent of a really nice vacation or two. Or, it could be new furniture for the house, new gadgets or toys (like a bike or golf clubs), or anything else that brings me joy.

    I’m a firm believer that we have to enjoy the journey while we’re on it. Having eliminated all high interest debt, I’ve earned the privilege to have some fun with a responsible portion of this money.

    The strange thing is that for people who are dedicated to achieving financial freedom, spending money can be very difficult.

    The temptation is to save and invest every possible dollar. As tempting as that may be, I encourage you to resist the urge to “live in the spreadsheet.”

    This is a chance to do something for yourself that brings joy and happiness. Whatever that is for you, take advantage.

    Otherwise, what’s the point in working so hard in the first place?

    Next, I would revisit my Tiara Goals for financial freedom.

    Let’s say after paying off high-interest debt and setting some money aside for fun, I have $100,000 remaining.

    What you do with the remaining $100,000 will vary depending on where you currently are in life and what your main priorities are.

    This is why I always talk about the importance of having your ultimate life goals written down and consulting them regularly.

    I refer to my ultimate life goals as my Tiara Goals. Before I save and invest the remaining $100,000, I’m going to look at my Tiara Goals for inspiration.

    With my Tiara Goals in mind, my top priorities right now are to eliminate HELOC debt, pay for my three kids’ college, and build my emergency fund.

    Each one of these priorities align with my Tiara Goals and help me get closer and closer to true financial independence.

    Because I have been aggressively acquiring real estate for the past seven years, college savings and emergency savings have been secondary goals.

    Now that I’m not presently in the market for more rental properties, I can prioritize saving for college and emergencies.

    With this windfall, I can make significant headway to satisfy both of those goals.

    I would then use $67,000 to fund my son’s college education.

    I recently used an online calculator to figure out how much money I would need to invest right now in my son’s 529 savings account to fully fund his college.

    For my calculations, I targeted the premier in-state university where I live (the University of Illinois). I assumed a 10% average annual rate of return on my investment and a 5% annual increase in tuition.

    I learned that with an investment today of $67,000, I could fully fund my son’s in-state tuition.

    The key is to let that money grow for the next 15 years to take advantage of compound interest.

    What an accomplishment that would be to not have to worry about his future college. I could cross that item off the “to-do” list once and for all.

    So, with the next $67,000 of my windfall, I would fully fund my kid’s in-state tuition.

    Disclaimer: if you’re doing this math for your own three-year-old, keep in mind that I’ve already begun to fund my son’s 529 account. The $67,000 is the difference that I need to add today in order to hit my goal. If you do the calculations yourself, you might come up with a different number.

    With my son’s college tuition taken care of, I would move onto my next goal, which is to fund my emergency savings account.

    Before we get to that, you may be wondering why I targeted the in-state school for my projections instead of aiming for a more expensive private school.

    Why did I target in-state tuition?

    It’s not that I don’t want my kids to have the option to attend a more expensive private school.

    It’s that I have other goals that I want to accomplish in my life at the same time I’m saving for college. I view the in-state tuition target as a reasonable, minimum goal to strive for.

    And, if my kid chooses to attend a more expensive private school, I plan on having additional ways to pay for it.

    For example, my overall financial plan includes owning rental properties even after my kids go to college. I can use that rental property income to help pay for college.

    Additionally, I plan on still earning income through a primary job. I can use that income to help pay for their college.

    Between now and then, I can invest in more rental properties, a traditional brokerage account, or any other investment vehicle of my choosing.

    I’ll still have the option to use that money to pay for college. The benefit is that I’ll have more flexibility.

    Plus, you never know. Maybe my kid will earn a scholarship. Maybe my kid does not end up going to college.

    Having different investments besides a college savings plan means that I’ll have options.

    slot machines showing 7's, which is not the best way to think about your future but is a good time to think about what you would do with a windfall.
    Photo by SLNC on Unsplash

    I would save the remaining $33,000 in an emergency savings account.

    Finally, I would take the remaining $33,000 and put it into a high-interest savings account.

    I have no immediate needs for this money. I have income coming in from a variety of sources, including my primary job, my rental properties and my job as an adjunct professor.

    However, it’s been a goal of mine for a few years to bump up my emergency savings. It’s been a risk not having much saved up for emergencies, and I’m taking this chance to eliminate that risk.

    Because I’m not currently in the market for more real estate, I can save this money for emergencies instead of worrying about a down payment for my next acquisition.

    With my emergency savings account more adequately funded, I can better protect myself should disaster strike.

    That’s why I’m putting the final $33,000 in my emergency savings account.

    How would you use $178,000 today?

    So, that’s how I would use a $178,000 windfall today.

    It’s not as fun as thinking about $1.78 billion, but it’s a more realistic thought experience.

    In case you’re wondering, if I had more money to invest at this point, I would focus on my baby girl’s college. I would use the same methodology that I used to plan for my son‘s college.

    No matter the amount of money, it’s good to have a plan ahead of time. As a high-earning professional, the odds are that you will earn a significant bonus like this at some point in your career.

    It might not be $178,000, but the thought process will work no matter what the amount is.

    The takeaway is that it’s always a good idea to have a plan before you earn the money.

    Enjoy some. Save and invest the bulk of it.

    What would you do with a windfall like this?

    Let us know in the comments below.

  • Financial Independence is Not About a Life of Deprivation

    Financial Independence is Not About a Life of Deprivation

    Stop me if you’ve heard this advice before:

    “Cancel all your subscriptions and save $1,000 a year!”

    “Cut out your morning coffee if you really want to be wealthy!”

    “Buy your Christmas presents in January when the sales start!”

    Because of advice like this, there’s a common misconception that people who want financial independence have to lead a life of deprivation.

    Nope.

    I refuse to believe that.

    Financial independence about so much more than that.

    Financial independence is not reserved for people willing to cut their spending to the bone.

    It’s for anyone willing to make intentional money decisions, including the decision to earn more money and not cut spending.

    How did financial independence become synonymous with deprivation?

    As my three-year-old asks during story time, “And, then there’s a problem?”

    Yes, son, there’s a problem.

    Too many people believe that financial independence is only about cutting spending.

    That’s a big problem that is holding people back.

    See, most of us lawyers and professionals work a ton of hours. We are already making major sacrifices.

    To throw in major reductions in spending on our way to financial independence is not a worthwhile tradeoff.

    Life is too short. None of us are guaranteed tomorrow.

    I learned this lesson a long time ago by representing clients with mesothelioma, a sudden and fatal cancer.

    That’s why I never encourage anyone to cut out spending on things and experiences that make them happy today.

    Does this mean we should all go out and spend every dollar we make?

    Of course not.

    No matter what, you’ll always need to live within your means.

    If you are spending more than you’re earning, you’ll never be financially independent.

    However, if you earn decent money and invest it the right way, you will reach financial independence.

    And, you don’t need to stop spending money on the way.

    FIRE has taken on an unintended meaning.

    One of the problems in the personal finance space is that many people first learn about financial independence in the context of FIRE (Financial Independence, Retire Early).

    Unfortunately, there’s a stereotype that FIRE is only for people willing to aggressively lower their expenses.

    In other words, the mistaken belief is that people who practice FIRE can only survive if they cut out most of life’s luxuries.

    Even though this misconception fails to capture the true spirt of FIRE, the damage has already been done.

    Too many people who I speak with get so discouraged by hearing “cut, cut, cut!” that they lose all interest in pursuing financial independence.

    It’s not that these people are financially irresponsible. They mostly live within their means and save for important goals.

    At the same time, they want to enjoy everything that life has to offer. And as mentioned above, I don’t mean enjoy life “years down the road.” They work hard and want to spend money to enjoy life today.

    For people like this, FIRE’s perceived focus on deprivation is unappealing.

    This is one of the reasons I don’t like to use the word FIRE around here. I prefer FIPE: Financial Independence, Pivot Early.

    Standing on a sheer ledge illustrating that financial independence is about having more, not spending less.
    Photo by Jason Hogan on Unsplash

    Have you noticed in the blog that we talk more about investing than cutting expenses?

    If you’ve been a consistent reader of the blog, you likely noticed that we haven’t talked much about cutting back on spending lately.

    We’ve been focused on creating wealth through investing, whether your preference is to invest in stocks or real estate.

    I certainly encourage people to generate as much fuel as possible for their investments, especially early in their careers.

    That way, you can benefit from long-term wealth generators like compound interest and appreciation.

    Generating more money to invest, of course, involves making spending choices. These types of choices are the essence of the budgeting process.

    However, instead of focusing on cutting your expenses to the bone, I recommend you create a reasonable Budget After Thinking that you can actually stick to.

    If you eliminate all the fun stuff, no budget will last very long.

    In a lot of ways, this advice is like dieting. Sure, you can lose 10 pounds in a few weeks if you eliminate every indulgence. But, how long is that diet going to work?

    I recommend that you have a budget that you can stick to long term. Then, commit yourself to fighting lifestyle creep as you start making more money.

    If you can do those two things, you don’t have to dramatically cut your expenses.

    Yes, you have to keep your spending within reason.

    No, you don’t have to cancel all your subscriptions.

    Focus on earning more, not just spending less.

    A good friend of ours just made $750 by doing one property showing. In total, she probably worked an hour to earn that money.

    Compare that to the advice of cutting out your daily coffee ritual. If you consciously deprive yourself of coffee every day for an entire year, you could save about $1,000.

    What would you rather do?

    Work just a little bit more with a side hustle of your choosing, or cut out something that you enjoy each morning?

    Do you really have to think that long about it?

    Of course, you already know which option I’m pursuing.

    woman sitting by water Bodega Bay ocean with woman standing by water illustrating that financial independence is about having more, not spending less.
    Photo by Becca Tapert on Unsplash

    I am a big fan of side hustle.

    I’ve had side hustles for just about my entire career as a lawyer.

    My first side hustle was as an adjunct professor at a local law school, teaching just one class. I eventually turned that into teaching four classes.

    In the meantime, I also launched a rental property business with my wife, now managing 11 units in Chicago and Colorado.

    We’re doing this with three young kids at home. I’m not bragging. My point is that I roll my eyes whenever anyone tells me he is too busy to make extra money.

    By the way, earning more money does not only apply to side hustles.

    There are always ways to make more money within your primary job.

    For example, can you earn a larger bonus by performing better?

    Can you ask your employer for more responsibilities and a corresponding raise?

    Or, can you earn additional money by generating business for your company?

    Lawyers, like most professionals, have the ability to earn more money if they generate business. That means bringing in clients.

    How can you find these clients?

    You can make it a priority to go to more events where you might meet potential clients.

    You could launch a blog or create other content to help people find you and know what you do.

    Either one of these pursuits could be your side hustle.

    There are endless opportunities for anyone that is motivated and is looking to earn more money.

    And when you earn that additional money, you’re on your way to financial independence without having to sacrifice the things that make your daily life enjoyable.

    OK, but I don’t even like coffee.

    I know, I’m picking on coffee. Coffee is an easy target, but it’s just one example.

    Maybe coffee is not your problem. Let’s say that you’ve cut out family vacations.

    Family vacations can be expensive. There’s no doubt about it.

    But instead of eliminating vacations, what if you could find a way to earn an extra $5,000? That could turn into a really nice family vacation.

    For some people, this is a no-brainer. They find a way to earn more money.

    Other people will simply skip the family vacation because it’s too expensive.

    At this stage in my life, I’m not willing to do that. I have three young kids. I already feel like they’re growing up too fast.

    A year ago, my daughter wouldn’t let go of my hand when I walked her to school. Now, she’s “too cool” to waive goodbye to Daddy.

    The idea of skipping out on family vacations does not appeal to me at all. I know that there will come a day when I would really regret that choice.

    Instead of eliminating family vacations, I would rather find a way to make more money.

    You can have anything you want; you just can’t have everything.

    Warren Buffett famously told his kids that they could have anything they wanted. They just couldn’t have everything.

    That sums up my approaching to spending. If there’s something I truly want that doesn’t currently fit in my budget, I would prefer to earn more instead of giving up on having that thing or experience.

    I might get there through a side hustle. I might get there through investing. If it’s something I value enough, I will get there one way or the other.

    If you focus on your income, not just cutting expenses, you can continue your journey to financial independence without giving up these things that make life special.

    Or, you can cut out the coffee and vacations, if that’s your preference.

    I’d rather challenge myself to make more money so I don’t have to make those sacrifices.

    Do you think financial independence is only for people willing to aggressively cut their spending?

    Or, do you agree that financial independence is for anybody willing to work for it?

  • How to Think About Investing in Both RE and the Stock Market

    How to Think About Investing in Both RE and the Stock Market

    Let’s say that you have $200,000 that you want to invest.

    Up to this point, all of your investments are in the stock market, mostly through tax-advantaged retirement accounts like a 401(k).

    However, you’ve recently started thinking about buying your first rental property.

    You have an important question to sort through:

    Should you buy your first rental property or just keep investing in the stock market?

    This is a common dilemma for all real estate investors, not just people thinking about buying their first rental property. Personally, I’ve been thinking about this question quite a bit lately.

    The way I see it?

    Why not do both?

    Why not build your overall investment portfolio to include both stocks and at least one rental property?

    Today, we’ll explore why you may want to invest in the stock market and own rental properties.

    If you’ve been on the fence about buying your first rental property, this post will help you think about why it may be a good idea.

    Real estate is my favorite asset class.

    It’s no secret that real estate is my favorite asset class. Without my four rental properties, my journey to financial freedom would look much different.

    I’m confident that real estate will remain a powerful asset class moving forward.

    That’s because no matter how much the world changes with AI, quantum computing or any other new technology, I know one thing will always be true:

    People will always need a place to live.

    At this point in my life, I know that I’ll never become a brilliant coder or software engineer solving the world’s hardest problems.

    But, I can provide the geniuses a place to live.

    That’s why I’m comfortable with the majority of my net worth being in real estate right now.

    By investing in rental properties, I can make money in four different ways:

    1. Rental property cash flow is king.

    With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses. 

    For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

    If your present day expenses are already covered, you can use your cash flow to fund additional investments. 

    That might mean buying another rental property or investing in another asset class, like stocks.

    2. Long-term wealth through appreciation.

    Appreciation simply refers to the gradual increase in a property’s value over time. 

    While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

    Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

    To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

    3. With rental properties, other people pay off my debt.

    When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

    However, I do not pay that debt back with my own money. 

    Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

    I then use those rent payments to pay back the loan.

    As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

    When my equity in a property increases, my net worth increases. 

    4. Real estate investors earn massive taxes benefits.

    When you earn rental income, you must report this income on your tax return. Rental income is treated the same as ordinary income.

    However, the major difference between rental income and W-2 income is that there are a number of completely legal ways to deduct certain expenses from your rental income.

    Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.

    With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.

    Yes, you read that right.

    I’ll say it again, just to be clear:

    Most savvy real estate investors legally pay nothing in taxes on their rental income each year.

    Even though I love owning rental properties, I still invest in the stock market.

    While there are certainly real estate investors out there who are 100% committed to real estate, I’m not one of them.

    Even with my passion for rental property investing, I have a significant portion of my net worth in the stock market.

    For one reason, I enjoy having some totally passive income streams. Compared to being a landlord, there is essentially zero work involved in being a passive stock investor.

    For another reason, I see the value in having multiple, diverse streams of income to help protect me against life’s uncertainties.

    Plus, like many of you, my investing journey began with my employer-sponsored 401(k) plan.

    401(k) investing is easy and relatively straightforward. With automatic contributions from my paychecks, I don’t even need to think about funding my account.

    As a W-2 employee since 2009, without even thinking about it, I’ve invested regularly in the stock market and enjoyed the benefits of compound interest.

    As my career progressed and my family grew, I added investment accounts to my portfolio.

    Besides my 401(k), my favorite investment accounts include a Roth IRA, 529 college savings accounts for my three kids, and a Health Savings Account.

    In conjunction with my rental properties, I view each of these different investments as part of my overall strategy to reach financial independence.

    Combined, I refer to these different investment and income streams as Parachute Money.

    Reach for the sky. Sometimes normal is too boring. invest in both real estate and the stock market for a safe landing with Parachute Money.
    Photo by Vlad Hilitanu on Unsplash

    What is Parachute Money?

    Parachute Money is one of my favorite concepts in all of personal finance.

    Pretend your life is like flying on an airplane.

    For whatever reason, you decide you need to get off this airplane. You decide to take control and make a change. You’re ready to jump.

    All you need is a parachute.

    You have a choice between the only two parachutes on the plane.

    The first parachute has only one string (or line) connecting the canopy to the harness . You think to yourself, “This doesn’t seem very safe. What if that one string breaks? That would end very badly for me.”

    Then, you look at the second parachute.

    The second parachute has 10 strings. You say to yourself, “OK, this one looks much safer. If one string breaks, the parachute still has nine other strings to keep me safe. Even if something goes wrong with one or two strings, I would glide safely to the ground.”

    It’s obvious which one of these parachutes to choose, right?

    Why is having Parachute Money important?

    The central idea of Parachute Money is to create multiple sources of income so you are not beholden to any one source.

    Picture each source of income as a string on your parachute. The more strings on the parachute, the stronger it is.

    With Parachute Money, if one of your sources of income dries up, you are more than covered with your other sources.

    Likewise, the more sources of income you have, the stronger your personal finances are.

    Parachute Money includes your primary job, any side hustles, any income generating assets, and your emergency savings account. It also includes the income of your significant other, if you share finances.

    The key to Parachute Money: protect yourself with as many investment and income sources as you can.

    That’s why I own stocks and own rental properties.

    Should I buy a rental property or stick with the stock market?

    Lately, I’ve been asking myself this very same question, “Should I look into buying a fifth rental property? Or, should I invest that money in the stock market?”

    There are certainly lifestyle considerations that go into this question beyond just the strength of the investment on paper.

    For example, owning rental properties means taking on a job. On the other hand, investing in the stock market is mostly passive.

    If you’re not ready for the job of being a landlord, then you should stick with investing in stocks.

    Setting lifestyle considerations aside, we all have limited dollars available to invest. And, we work hard for those dollars.

    When we choose to put those hard-earned dollars to work for us, we want to make sure we’re getting a good return on our investment.

    It’s hard enough deciding where to invest your money once you’ve decided on the asset class. Take real estate, for example.

    Even if you know you want to buy a rental property in a specific area, there might be hundreds of potential properties available.

    Picking the right property is not easy and requires some careful analysis.

    How much more difficult does the decision become when you’re not even sure if you should invest in real estate or invest in the stock market?

    That decision can start to feel overwhelming.

    The perfect landing with a parachute indicating the importance of having parachute money through real estate and the stock market.
    Photo by Ali Kazal on Unsplash

    Deciding between various asset classes can feel overwhelming.

    With so many investment choices out there, it can be difficult to choose where to invest your money. That’s why it’s useful to have a way to compare one type of asset class to another.

    Then, you can consider investment opportunities in different assets classes and make informed choices on where to invest.

    Fortunately, we can use two simple metrics to help with this analysis:

    1. Cash on Cash Return on Investment (CoCROI)
    2. Return on Investment (ROI)

    Real estate investors have long used these two metrics to decide if a potential property is a good deal compared to investing in the stock market.

    In our next post, we’ll take a close look at each of these metrics. We’ll learn how each of these metrics can help you compare a rental property investment to typical stock market returns.

    Don’t worry if math is not your favorite thing.

    These two numbers are easy to calculate with an online calculator. The key is to make sure you understand the underlying principles and variables that go into the calculations.

    Are you comfortable investing in rental properties and the stock market?

    I like to invest in rental properties and the stock market to protect myself from economic and life uncertainties.

    I don’t want to be all-in on only one asset class.

    So, I view my rental properties and my stock investments as parachute strings working together to protect me should my airplane start going down.

    Because I’m comfortable investing in both rental properties and the stock market, I need a way to help choose between options across those asset classes.

    In our next post, we’ll learn how to do just that.

    Do you invest in the stock market and in rental properties?

    Which asset class did you invest in first?

    Is part of your reasoning for investing in both asset classes to add layers of protection to your overall finances?

    Let us know in the comments below.

  • How to Gain Confidence by Calculating Your Coast FIRE Number

    How to Gain Confidence by Calculating Your Coast FIRE Number

    Have you ever wondered if you really need to keep saving for retirement?

    Believe it or not, you may be closer than you think to achieving your retirement goals.

    That’s a very powerful realization.

    Think about the options you can create for yourself if you no longer need to save a hefty chunk of your paycheck for retirement.

    We recently explored some of these options while talking about the money mindset hack known as Coast FIRE.

    Today, we’ll look at some specific examples of how to calculate your Coast FIRE number so you can see how you stack up.

    By calculating your Coast FIRE number, you may just find that you have more options than you ever thought possible.

    Let’s explore.

    What is Coast FIRE?

    Coast FIRE is a subset of FIRE for people who are not necessarily trying to retire early.

    Instead, the idea is to aggressively fund your retirement accounts early on so you have more options as your career progresses.

    The reason you’ll have options is because once you hit your projected magic retirement number, you no longer need to fund your retirement accounts.

    You can sit back and let compound interest do its thing. Your retirement years are covered.

    With retirement covered, you don’t need to earn as much money. You can focus more attention on your present-day self. That might mean working less hours or working the same amount but in a different job.

    This is the essence of Coast FIRE: knock out retirement planning early on to create more career flexibility later.

    Coast FIRE does not mean complete financial independence.

    When you reach Coast FIRE, you are not financially independent because you still need money coming in to fund your current lifestyle.

    But, you need less money because you no longer need to save for the important goal of retirement. That means you have earned some financial freedom, but not complete freedom.

    That’s OK.

    Remember, the part that separates Coast FIRE from traditional FIRE is that early retirement is not the goal.

    Instead, Coast FIRE means continuing to work until normal retirement age (like age 65) but having more freedom in what you do for work.

    To put a bow on it: the main money mindset benefit of Coast FIRE is that you have options once you’ve already put away enough money for retirement.

    With retirement taken care of, you can:

    1. Switch to a lower paying job or lower stress job.
    2. Become a stay-at-home parent and live off of one spouse’s income.
    3. Start a business.
    4. Grow your side hustle.
    5. Take some time off to think about what you want to do next.

    With Coast FIRE, each of these options feels safer because you’ve already fully funded your retirement.

    Your Coast FIRE number is not the same as your FI number.

    As we’ll explore below, your Coast FIRE number is different from your FI number (what I sometimes refer to as your magic retirement number).

    Your Coast FIRE number is the amount you need saved up today to stop saving anymore for a traditional retirement. You still need to earn money to fund your current lifestyle.

    Your FI number is the amount you need saved up today to retire and live completely off your investments for the rest of your life.

    You’ll see below that your Coast FIRE number is usually significantly lower than your FI number.

    This is especially true the further away you are from traditional retirement age. That’s because you have a longer time horizon for compound interest to do its thing.

    In fact, the reason Coast FIRE is such a powerful money mindset hack is because the Coast FIRE number seems much more attainable.

    This of it like this: have you ever felt that it seems impossible to save millions of dollars for retirement?

    The truth is you don’t have to come up with all that money on your own. Your job is to aggressively seed your retirement accounts early on so compound interest can do the heavy lifting.

    By funding your retirement accounts early in your career, you don’t need millions of dollars. You actually need way less.

    Calculating your Coast FIRE number will drive this point home.

    Bonfire on a coast with mountains in the background indicating the power of calculating your Coast FIRE number.
    Photo by Courtnie Tosana on Unsplash

    How do I calculate my Coast FIRE number?

    There are some great online calculators available to figure out your Coast FIRE number.

    You simply plug in a few variables, like your current age, desired retirement age, and anticipated spending in retirement. It couldn’t be easier.

    The Fioneers and WalletBurst each have easy-to-use calculators that I recommend. There are plenty of others, but these two are simple to use.

    What’s nice about each calculator is that you can play around with the inputs to explore various scenarios. You can also see how your Coast FIRE number is significantly lower than your FI number.

    The WalletBurst calculator has a helpful graph for visualizing your progress towards Coast FIRE.

    The Fioneers calculator has a nice feature where you can input other sources of passive income, like income from a rental property.

    As we know, adding just one rental property to your investment portfolio can massively shrink your magic retirement number and accelerate your journey to financial freedom.

    If you’re thinking about rental property investing to supplement your retirement income, check out my recent post:

    Shrink Your Magic Retirement Number With One Rental Property

    Note: The Fioneers’ calculator is a Google Sheet you can download, but you need to enter your email address first. You do not need to enter an email address to use the WalletBurst calculator.

    Using these calculators, let’s take a look at a few examples.

    Let’s explore three different scenarios where knowing your Coast FIRE number can be very useful:

    1. Clarke is 35-years-old and ready for a new job.
    2. David is 40-years-old and worried about paying for college.
    3. Dorothy is 28-years-old and just paid off her student loans.

    In each of these examples, we’ll assume a standard retirement age of 65 and an annual rate of return of 10% (on par with the historical results of the S&P 500).

    We’ll also factor in a 3% inflation rate (the historical average in the United States).

    Finally, we’ll assume a safe withdrawal rate of 4.7% in light of the updated “4% Rule.”

    In case you missed it, Bill Bengen, creator of the 4% Rule, just released a new book with some fun news for all of us saving for retirement.

    Bengen’s updated research shows that it’s safe to increase your withdrawal rate in retirement from 4% to 4.7%.

    Bengen’s new book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

    Let’s dive in.

    Coast FIRE Example 1: Clarke is 35-years-old and ready for a new job.

    Clarke is 35-years-old and is ready for a career change.

    His job at a prestigious law firm has taught him a lot and he’s made good money. But, the stress and the hours are starting to take a toll on his personal life and on his health.

    He’s ready to pivot.

    Because he was making good money, Clarke maxed out his 401(k) retirement plan for the past 8 years. He now has $400,000 saved up. He also currently adds $5,000 to his various retirement accounts each month.

    His goal is to have $200,000 annually to spend in retirement.

    Based on the above variables, Clarke’s Coast FIRE number is $559,009.

    At his current saving rate, he will reach Coast FIRE in three years. That means that at the age of 38, he will no longer need to fund his retirement.

    He could then pursue a lower paying, lower stress job without sacrificing his retirement years.

    Note: Clarke’s FI number (magic retirement number) is significantly higher: $4,255,319.

    That’s a big number and can seem intimidating. His Coast FIRE number is more encouraging to think about.

    Yes, he’ll have to keep working to fund his current lifestyle. But, he can choose to work a lot less.

    What if three years still seems too far away for Clarke?

    Using the Coast FIRE calculator, Clarke learns that if he ups his retirement contributions from $5,000 per month to $8,000 per month, he will achieve Coast FIRE in two years.

    That’s powerful information. If he boosts his saving rate even more, he can pivot even faster.

    Armed with the knowledge of his Coast FIRE number, Clarke has a newfound motivation to stick it out at his current job for just a bit longer.

    two boats near stone island indicating the power of calculating your Coast FIRE number.
    Photo by Jan Tielens on Unsplash

    Coast FIRE Example 2: David is 40-years-old and worried about paying for college.

    David had a kid about a year ago and is freaking out about paying for college. He knows that it’s important to prioritize his own retirement before prioritizing his kid’s college.

    David has $300,000 saved for retirement. His goal is to spend $150,000 annually in retirement. He currently has $6,000 available to invest each month, whether that’s for retirement or college.

    Let’s help David out by using the Coast FIRE calculator.

    Plugging in these variables, we see that David’s Coast FIRE number is $588,029.

    Notice how David’s Coast FIRE number is higher than Clarke’s, even though he plans to spend less in retirement. That’s because he has a shorter time horizon and less currently saved.

    This is another reminder to start investing early and often.

    Even so, David is in great shape for retirement. At his current pace, David is 5 years away from reaching Coast FIRE. His daughter will only be six-years-old at that point.

    That means that David will still have 12 years to prioritize saving for his daughter’s college, all while knowing that his retirement is covered.

    This knowledge makes David feel much better. He’s no longer worried about paying for his daughter’s college at the expense of saving for retirement.

    Coast FIRE Example 3: Dorothy is 28-years-old and just paid off her student loans.

    Dorothy is 28-years-old and is in the early stage of her career as a lobbyist in Washington D.C. She lives with 3 roommates outside of town and keeps her expenses very low.

    Dorothy has her whole life ahead of her so hasn’t thought too much about the specifics of retirement.

    But, she knows enough to think and talk money with her friends and family every once in a while.

    In one of these conversations, she learned about Coast FIRE and was interested in calculating what her number is. Dorothy thought about how amazing it would be to pursue a life on her own terms without worrying about retirement.

    Dorothy just finished paying off her student loans. Because she was focused on her loans, she currently has only $10,000 saved for retirement.

    She now plans to roll the $5,000 per month she had been using for loan payments into her retirement account.

    Because she was so far away from retirement, Dorothy thought it was best to error on the side of caution with her annual spending projections.

    So, Dorothy estimated that she would need $250,000 annually in retirement, much more than both Clarke and David figured.

    Based on the above, Dorothy’s Coast FIRE number is $435,153. She can achieve Coast FIRE by the age of 38!

    Dorothy’s Coast FIRE number is significantly lower than Clarke’s and David’s, even though she plans to spend way more in retirement.

    Of course, this is because she is getting started so early.

    Knowing that she can fund her entire retirement in just 10 years, Dorothy makes it a priority to do so.

    By the age of 38, she will be free to pursue any line of work she chooses without needing another dollar to fund her seemingly extravagant retirement.

    That makes Dorothy very happy.

    Use a Coast FIRE calculator to figure out your own number.

    The above examples show how knowing your Coast FIRE number can be so liberating.

    When you calculate how much you’ll need to retire, you may be surprised at how close you actually are.

    If you’ve been avoiding making big life decisions because of anxiety about retirement, knowing your Coast FIRE number can be a huge help.

    Clarke, David and Dorothy calculated their Coast FIRE numbers and were able to come up with manageable plans.

    Each person is on track for a desirable retirement, all while creating options for themselves earlier in life.

    Having options is a great thing.

    Have you calculated your Coast FIRE number?

    Were you surprised how close you actually are to achieving your retirement goals?

    Let us know in the comments below.

  • Shrink Your Magic Retirement Number With One Rental Property

    Shrink Your Magic Retirement Number With One Rental Property

    “Wait- how much do I need to save for retirement!?”

    Have you ever felt that way after learning how much money you think you need to retire?

    I’ve certainly felt that way in the past.

    The prospect of saving millions of dollars in order to retire can seem impossible, especially when you’re just starting out.

    You may have even wondered, “How do people even come up with these retirement numbers?”

    The most common answer to that question is the “4% Rule.”

    Using the 4% Rule, you can calculate your magic retirement number and determine how much money you need to save for retirement to maintain your current lifestyle.

    The 4% Rule suggests that you can safely withdraw 4% of your investments in year one of retirement. Then, you can safely withdraw 4% plus an adjustment for inflation in subsequent years. 

    If you do so, you can expect your money to last for 30 years.

    Today, we’ll take it one step further.

    Let’s explore how owning even a single rental property can further reduce the amount you need to save for retirement.

    The results may shock you- in a good way.

    How to use the 4% Rule to forecast your magic retirement number.

    First, let’s look at an example using the 4% Rule to forecast your magic retirement number.

    In some fun news, Bill Bengen, creator of the 4% Rule, just released a new book showing that it’s safe to increase your withdrawal rate in retirement from 4% to 4.7%.

    Bengen’s new book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

    If you’re at all interested in FIPE (Financial Independence Pivot Early), Bengen’s book is a must read.

    Bengen’s research is significant because it means you can safely retire with even less money. That’s because the higher your safe withdrawal rate, the less you need squirreled away to maintain your lifestyle.

    In light of Bengen’s updated research, we’ll use 4.7% as our safe withdrawal rate.

    Let’s say that your lifestyle costs you $10,000 per month, or $120,000 per year.

    To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .047.

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $120,000 / .047 =$2,553,191.49 

    Based on the updated 4.7% Rule, you need $2.55 million to maintain your current lifestyle in retirement.

    By the way, under the original 4% Rule, you would need $3 million in investments ($120,000 / .04 = $3,000,000.00).

    See why people are excited about the updated 4.7% Rule?

    Does saving $2.55 million for retirement seem like an impossible task?

    Saving $2.55 million for retirement may seem like an impossible task.

    If that’s your initial reaction, be sure to check out my ongoing series on investing. We cover everything you need to know to start investing with confidence.

    You may be surprised to learn that If you start investing early and often, reaching $2.55 million is actually not that hard.

    Even so, there’s another way to massively shrink your magic retirement number: owning rental properties.

    Why would anyone want to own rental properties?

    There are four main reasons why I invest in rental properties: 

    1. Monthly cash flow
    2. Appreciation
    3. Debt pay-down
    4. Massive tax benefits

    When these benefits combine, real estate investors can generate significant wealth over the long run.

    decorative lights under a tree at night showing how one rental property can shrink your magic retirement number.
    Photo by Jay on Unsplash

    Before we look at an example of how owning rental properties shrinks your magic retirement number, here’s a quick breakdown of each of the four main benefits. 

    For a more detailed description of each benefit, you can read my series on investing in real estate here.

    1. Rental property cash flow is king.

    With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses. 

    For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

    If your present day expenses are already covered, you can use your cash flow to fund additional investments. 

    That might mean buying another rental property or investing in another asset class, like stocks.

    2. Long-term wealth through appreciation.

    Appreciation simply refers to the gradual increase in a property’s value over time. 

    While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

    Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

    To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

    3. With rental properties, other people pay off my debt.

    When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

    However, I do not pay that debt back with my own money. 

    Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

    I then use those rent payments to pay back the loan.

    As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

    When my equity in a property increases, my net worth increases. 

    4. Real estate investors earn massive taxes benefits.

    When you earn rental income, you must report this income on your tax return. Rental income is treated the same as ordinary income.

    However, the major difference between rental income and W-2 income is that there are a number of completely legal ways to deduct certain expenses from your rental income.

    Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.

    With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.

    Yes, you read that right.

    I’ll say it again, just to be clear:

    Most savvy real estate investors legally pay nothing in taxes on their rental income each year.

    With these benefits in mind, let’s see what happens when we add a single rental property to your portfolio.

    How owning a single rental property lowers your magic retirement number.

    Let’s continue our example from above where your current lifestyle costs $120,000 per year. We learned that means your magic retirement number is $2.55 million based on the 4.7% Rule.

    Now, let’s add a single rental property into the mix.

    Let’s assume that you own a rental property that cash flows $2,000 per month. That’s a total of $24,000 per year.

    Remember, your cash flow is the profit remaining after paying your mortgage, taxes, insurance, and any other costs.

    To learn how to properly run the numbers on a potential rental property, click here.

    With $24,000 per year generated by your rental property, you don’t need your investment portfolio to fund your entire $120,000 lifestyle.

    Instead, your investments only need to generate $96,000 per year ($120,000 – $24,000 =$96,000).

    So, let’s plug $96,000 into our magic retirement number formula:

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $96,000 / (.047)=$2,042,553.19

    By adding a single rental property to your portfolio, you’ve lowered your magic retirement number by half a million dollars!

    You now only need $2.04 million to maintain your current lifestyle in retirement.

    Macro X-ray of some mushrooms with false coloring showing how to shrink your magic retirement number with one rental property.
    Photo by Mathew Schwartz on Unsplash

    What happens to your magic retirement number if you pay off your mortgage?

    This example shows how your magic retirement number drastically shrinks with the addition of just a single rental property.

    Keep in mind that in this example, we assumed that you have a mortgage on your rental property. That mortgage obviously reduces your cash flow.

    But, what if you paid off that mortgage before you retired?

    Let’s finish our example by assuming that you have a 30-year fixed rate mortgage and your payment is $3,500 per month. And, you make it a goal to pay off that mortgage before you retire.

    Once the mortgage is paid off, you can add that $3,500 to your monthly cash flow.

    That increases your monthly cash flow on this property from $2,000 to $5,500. Annually, that’s $66,000 in cash flow.

    Continuing our example, you now only need your investment portfolio to generate $54,000 per year ($120,000 – $66,000 =$54,000).

    Look what happens when we plug $54,000 into our magic retirement number formula:

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $54,000 / .047 =$1,148,936.17

    By paying off the mortgage on this single property, you’ve now reduced your magic retirement number by $1.4 million dollars!

    You now only need $1.15 million to fund your current lifestyle in retirement.

    Have you considered adding a rental property to your overall investment portfolio?

    The point of this post is to show you how owning even a single rental property can reduce your magic retirement number.

    Think about what would happen if you owned two rental properties. Or, what about three rental properties?

    If you can handle the job of being a landlord- which I’m betting is easier than your job as a lawyer or consultant or doctor- owning rental properties is a great way to accelerate your journey to financial freedom.

    After seeing the math, you may want to consider adding a rental property (or two) to your overall investment portfolio.

    Are you intimidated by the thought of saving enough for retirement?

    Have you done the math with the 4.7% Rule to see how much you really need?

    Have you considered adding a rental property to your portfolio to shrink you magic retirement number?

    Let us know in the comments below.

  • Is the 4% Rule Actually More Like the 4.7% Rule?

    Is the 4% Rule Actually More Like the 4.7% Rule?

    Bill Bengen, creator of the 4% Rule, just released a new book with some fun news for all of us saving for retirement.

    Bengen’s updated research shows that it’s safe to increase your withdrawal rate in retirement from 4% to 4.7%.

    If you are retiring today, it gets even better. Bengen’s research shows that you can safely withdraw around 5.25%.

    Bengen’s new book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

    If you’re at all interested in FIPE (Financial Independence Pivot Early), Bengen’s book is a must read.

    What is the significance of raising the safe withdrawal rate from 4% to 4.7%?

    If you are years away from retirement, you may be wondering, “Why does it matter if you withdraw 4% or 4.7% in retirement?”

    There are two ways to answer that question.

    Number 1: the higher the safe withdrawal rate, the more you can safely spend in retirement without running out of money.

    That sounds fun.

    You know what’s even more fun?

    Number 2: the higher the safe withdrawal rate, the less money you need to save before you can retire.

    That means you may be even closer to retirement than you previously thought.

    That sounds like even more fun, right?

    We’ll take a look at the math in a moment.

    The title of Bengen’s book says it all: “spend more and enjoy more.”

    Here at Think and Talk Money, enjoying our money is one of our primary objectives.

    We are not interested in building the biggest bank accounts just so we look good on a spreadsheet. We are interested in building a life where we are in control.

    That means spending money on what is important to us. It means spending more time with the people who are important to us.

    So, how does a higher safe withdrawal rate help us?

    Let’s explore that by first reviewing the 4% Rule

    What is the 4% Rule?

    The 4% Rule suggests that you can safely withdraw 4% of your investments in year one of retirement. Then, you can safely withdraw 4% plus an adjustment for inflation in subsequent years.

    If you do so, you can expect your money to last for 30 years.

    Without getting too technical, the 4% Rule is based off of research looking at historical investment gains, inflation, and other variables.

    As an example, let’s say you have $1 million in your portfolio.

    According to the 4% Rule, you can safely withdraw $40,000 in year one (4% of your portfolio), then 4% adjusted for inflation in each subsequent year, and not run out of money for 30 years.

    Using the updated “4.7% Rule”, you can safely withdraw $47,000 in year one.

    This simple example shows how you can take your current retirement savings and project the amount you can safely spend so your money lasts 30 years.

    El portero de San Juan FC, Tienes que crear tu propia suerte.-Fabien Barthez, illustrating the importance of having a target like the 4.7% Rule.
    Photo by ÁLVARO MENDOZA on Unsplash

    The 4% Rule also works in reverse. 

    By that I mean you can use the 4% Rule to ballpark how much money you’ll need in retirement to maintain your current lifestyle.

    We’ll look at exactly how to do that below.

    In either case, the 4% Rule is an effective and easy way to start thinking about a magic retirement number.

    How to use the 4% Rule based on your current savings.

    We mentioned above that the 4% Rule works two ways. 

    First, you can take your current retirement savings and calculate how much you can safely spend so your money lasts 30 years.

    If you have $1 million invested, the 4% Rule says you can safely spend $40,000 annually and expect your money to last 30 years.

    Here’s how the math works:

    Current Savings x 4% (.04) = Annual Retirement Spending
    $1,000,000 x .04 =$40,000.00

    Using the 4.7% Rule, the math looks like this:

    $1,000,000 x .047 =$47,000.00

    That’s a useful calculation, especially if you’re nearing retirement age and just want to know how much you can spend each year.

    But, what if you don’t exactly know when you want to retire? 

    Your main priority may not be to retire by a certain age. Instead, your aim may be to retire with enough money to maintain your current lifestyle. You’re determined to continue working for as long as it takes.

    To calculate that magic retirement number, you can once again use the 4% Rule. This time, in reverse.

    How to use the 4% Rule based on your current spending habits.

    The second way to use the 4% Rule is to start with your current spending habits to project how much money you’ll need to maintain that level of spending in retirement. 

    This may seem obvious, but to do so, you’ll first need to know your current spending habits. 

    If you don’t know how much you’re currently spending on a monthly basis, take a look at our budgeting series here.

    The good news is that once you’ve created a Budget After Thinking, this next part is easy.

    To calculate your magic retirement number based on current spending, simply follow these steps:

    1. Add up the amount your’re spending each month in Now Money and Life Money.
    2. Take that number and multiply it by 12 to see how much your lifestyle costs per year. 
    3. Divide that yearly spending by .04

    That’s your magic retirement number.

    Current Spending / 4% (.04) = Magic Retirement Number

    Now, let’s use some real numbers to help illustrate how to use the 4% Rule to project your magic retirement number.

    Here’s how to use the 4% Rule to forecast your magic retirement number.

    Let’s look at an example using the 4% Rule to forecast your magic retirement number.

    Let’s say that you reviewed your Budget After Thinking and learned that you spend $6,000 per month in Now Money and $4,000 per month in Life Money. 

    Combined, that means your lifestyle costs you $10,000 per month, or $120,000 per year.

    To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .04.

    Current Spending / 4% (.04) = Magic Retirement Number

    Under the original 4% Rule, that means to maintain your current lifestyle of spending $120,000 per year for 30 years, you would need $3 million in investments.

    In other words, your magic retirement number is $3 million.

    a chalkboard with the word possible written on it showing what's possible with the 4.7% Rule.
    Photo by Towfiqu barbhuiya on Unsplash

    If that number seems impossibly high to you, the updated 4.7% Rule should make you feel a little better:

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $120,000 / .047 =$2,553,191.49

    Based on the updated 4.7% Rule, you now only need $2.5 million instead of $3 million to maintain your current lifestyle in retirement.

    That’s fun news.

    Use the 4% Rule as an easy projection tool, not an actual withdrawal rate.

    Whether you want to use the 4% Rule or the updated 4.7% Rule, keep in mind that these are projection tools.

    I view the 4% Rule as a tool to ballpark your magic number, as opposed to a strict withdrawal rate once you actually retire. 

    I point that out because there’s some debate in the personal finance community as to whether 4% is still a safe withdrawal rate in today’s economic environment. 

    For our purposes, I’m not too concerned about that debate.

    Once you get to retirement, your actual withdrawal rate may be higher or lower than 4% depending on a variety of factors. Put another way, you will need to adjust how much you withdraw each year based on factors outside your control.

    Regardless, the 4% Rule is a great way to start thinking about how much you’ll need to save for retirement. Attaching an actual number to your retirement goals is extremely helpful.

    Like Bengen argues in A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More, the point of saving money now is to spend it and enjoy it later.

    For people who are used to saving aggressively during their working years, it can be hard to switch to a spending mindset.

    Whether you’re nearing retirement or still have years to go, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More will help you find that balance.

    Have you read A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More? What did you think?

    Will you update your retirement planning based on the new 4.7% Rule?

    Let us know in the comments below.