When I first started learning about this wonderful thing called financial independence, I soon came across a book that kept coming up in recommendation lists. It’s called The Millionaire Next Door.
In the book, the authors analyse the spending habits of thousands of families and individuals in America over several years, to see what conclusions they could reach. Oh yeah, just one small note; they were all millionaires.
What surprised them was that most millionaires were not people with huge trust funds, CEOs of big corporations, or lottery winners. They were mostly regular people, with regular jobs and regular income, who understood that they needed to earn more money than they spent.
The most shocking conclusion is that, as the title of the book suggests, those elusive millionaires could be your neighbour or the mechanic who fixes your car, or your colleague at work. It doesn’t matter where they go on holidays, or which car they drive, or how expensive their hobbies are – those are completely separate facts to how much money they have in the bank.
Millionaires Know How To Spend Less Money
I can almost hear you asking; “how did they really do it? Surely it can’t be as simple as saving a bit of money every month!”
Well… yes and no. Let me explain.
It’s true that nobody is going to get very far by saving $10 a month. They could, however, get pretty far with $500 or $1,000, and enough time.
It all comes down to the difference between what you earn and what you spend. AKA your savings rate.
Take a look at one of my favourite toys on the internet. It’ll tell you when you’ll be able to retire based on your savings rate. Go play with the numbers a little, the results are very interesting…
A Million isn’t a Million
If you’ve had a play around in Networthify, and you’ve changed the numbers around, you’ll see that the savings rate and the time to retirement are linked directly. You could have a salary of 5 million or one of 30,000 – if you managed to save 50% of your take-home salary you’d have enough money to be financially independent in less than 17 years.
That’s because you’d be spending what you weren’t saving, and thus, your expenses at a 5M salary would be 2.5M per year, and at 30k would only be 15k. At the higher salary, you’d be able to accumulate heaps of money every year, but you’d also have much longer to go, to be able to cover your 2.5M in yearly expenses. The opposite goes for the 3ok scenario; you’d be able to save a smaller amount than your millionaire alter-ego, but would have a much lower target.
The ideal scenario, however, would be something in the middle. A high salary, a very high savings rate, and low expenses. At a 75% saving rate, for example, you’d be able to retire in about 7 years!
Seriously, imagine never having to work again in 7 years!
By the way, all these calculations assume you’d start with no money to your name whatsoever. Logically, the process would become quicker with some seed money!
That, in a nutshell, is how many millionaires get there. They spend less money than they could and don’t succumb to lifestyle creep (where the more you earn, the more you spend). They get higher salaries and then make their money grow by investing it in wealth producing assets like stocks or property.
Once they amass enough money, these assets will produce enough cash to cover their expenses – forever. Mr. Money Mustache has a great post on this, which I encourage you to read.
No, that’s not a fairytale, and I’ll show you how you can do it too in later posts.
Thank you so much for reading!
What’s your current saving rate? What would you like it to be? Let me know in the comments below!
PS. If you want a more versatile calculator to tell you how much longer you’ll have to keep working before you can be free do do what you like, enter your e-mail below and I’ll send it your way.