#2 The obligatory get rich in one blog post blogpost

There is no risk responsible way to get rich quickly without working and hell knows that there have been far too many hucksters and mountains of books elevated on the backs of those promising sirens.  There is however a very simple way to get rich somewhat more slowly with work and discipline.  In 2 words, the way to do it is “compound interest.”  Einstein called compound interest the most powerful force in the universe and that guy was kind of smart.  Those who understand compound interest earn it and those that don’t understand it pay it in the form of debt.  Compound interest means that if you could save 10 dollars a day for 100 years it would be worth over $100,000,000!  I know, half of you probably think I’m smoking crack but this is real and it is true:

Compound Interest: The Most Powerful Force in The Universe

$10 per day saved = $3650 saved per year.  If this money is invested at a 7-8% annual return (totally do-able looking at the historic average of a set it and forget it stock market index fund like vanguard) this is what happens:

Year #1 =   $3650 annual contribution

Year #2 =   1.08 x 3650 + 3650 annual contribution = 3942 + 3650 = $7592

Year #3 =   1.08 x 7592 +3650 annual contribution = 8199.36 + 3650 = $11849.36

Year #4 =   $16,447.31

Year #5 =   $21,413.09

Year #10 = $52,875.95

Year #20 = $167,031.17

Year #30 = $413,483.72

Year #40 = $945,556.29

Year #50 = $2,094,261.07

Year #60 = $4,574,228.53

Year #70 = $9,928,292.27

Year #80 = $21,487,314.31

Year #90 = $46,442,375.95

Year #100=$100,318,482.32

Insights Into Compound Interest

If you are not currently saving money, This visual should be eye opening to you because it shows 10 dollars a day saved either making you a millionaire in 41 years, or 10 dollars a day in credit card debt costing you millions over a lifetime, especially when you consider that credit card interest rates can be more like 17% + late fees rather than 8%.  How is that kind of exploitation even legal!?  The other thing that you may have noticed in the chart above is that when you are saving, years 1-10 don’t look that interesting but from year 90 to 100 over 50 million dollars just went into your bank account.  This shows the importance of getting out of debt and saving as early as possible because the last few doubles in a compounding savings account are what make or break your ability to retire in a mansion versus work until you are 70 reporting to some 25 year old who thinks that you are an irrelevant pain in the ass dabnabbit.  To model your own savings, check out the rule of 72 as a place to start or model your own financial independence plan using an online compound interest calculator like this one.    

5 Steps to Financial Independence and My Story

Now I am going to take you through 5 simple steps to financial independence sharing a little about my story as we go:

#1 Get a living wage source of income (a higher salary makes a huge difference)

If you are making less than $20 per hour household income in the United States, you might not actually have a career, just a job and eventually a debt emergency.  Even a $1 per hour difference in pay rate compounded at 8% over a 30 year career is around $246,000.  This is owning your own home versus a rent payment every month!  The earlier and the more that you can move up the pay scale the better.  An easy way to see if your pay is even viable is to google the cost of living in your city or state and see if you can even afford to live there with the job that you have.  If you are flipping Big Macs in San Francisco, you may be in trouble.  My wife and I both got college degrees in engineering and we both worked which gave us an advantage on this one.  I am not saying that is everyone’s path, but that was ours.  Choosing or changing to a higher paying career or supplementing your income in order to work a job that you love can have you financially independent in a fraction of the time.  Let me give you an example:

I know someone who is a healthcare professional with a single income.  40 years ago his job qualification changed and he passed on getting a couple more credits to qualify for the next credential level up.  It wasn’t some big choice, it was just one memo in his pile of things to do and priorities.  He was busy raising 2 kids and working his tail off.  Today his job may make $21 per hour and the title with the credential $32.50.  If this held over 40 years of working an $11.50 per hour difference in pay amounts to $23K per year or $920,000 if he would have gotten that credential.  Moreover, with compound interest at 7%, he could have an extra $4,913,020.11 in the bank if he would have gotten the extra couple of credits to get the credential.

Let’s consider a 2 income family both with high paying college degrees trying to save enough to be financially independent vs a single income bachelor of arts average salary of $43K per year:  

As shown above, one happy couple gets to retire or be financially independent in 7 years 8 months while the other has to work for 43 and a half years.  Why?  Look at net savings per year.  Even if our bachelor of arts average guy could get a $1.50 per hour after tax raise annually, his net savings would double from $3000 per year to $6000 and he could retire about 10 years sooner! Huge differences come from income amount and dual incomes versus one.  How can you raise your income or lower your expenses to raise your net household savings per year?

#2 spend less than you make (preferably way less)

While some of our friends who started their careers demanded only the finest things in life, bought BMWs, and took on huge mortgages, we have been able to save in the 6 figures for most of our working life.  My best advice here is to really look at the value that you get from your expenditures versus what they cost.  When the value is low compared to the cost, it becomes easy to tell what spending to cut.

#3 pay off your debts and then save

Unfortunately, no one educates us about debt.  I can’t remember a single class in all of my schooling that talked about it ever.  If it wasn’t for my dinner table finance degree growing up, I would probably think credit was some sort of great American right.  The majority of Americans are in personal debt to the tune of 13.2 trillion dollars or about $44,000 per person.  If you are carrying a credit card balance each month or have high interest loans you need to get free ASAP.  Before reading any more of my blog, I suggest that you work on your debt.  Google some resources and get advice from people that you trust (not from some for profit debt relief company).  Is any debt ok?  This is a tough one and depends on your situation.  For example, the only debt that I have is a low interest mortgage (around 4%) which for tax reasons actually makes sense for me to have and invest more money rather than pay off this loan.  

#4 invest what you save and have a plan that you review at least once a year (make 6-8% annual return on your savings)

Investing is a whole other topic and I will definitely talk more about it.  One who is new to investing might first consider low expense ratio index ETFs.  One could invest some cash, leave it alone for a couple decades and if the last 90 years of performance trends hold, get 6-8% annual return.

#5 keep doing #1-4 and you will have financial independence in around 5-20 years.

This one is the hardest of all the steps.  It’s like juggling, the steps are basic but it takes practice and dedication to do.  The beginning looks boring when you are only socking away a few grand but after 20 years of savings when you see big compounded income coming in, then it gets easier.  

Financial Independence, How Long Will It Take?

I don’t want to claim that getting your financial independence is easy and it will be harder or easier depending on your personal situation. If you have a great job and/or really pinch those pennies you can get your financial independence in 9 years like Mr Money Mustache  or maybe just 1500 days like this guy.  What I advocate for your financial independence is that you don’t focus on being rich but instead focus on living way scaled back as compared to our hyper-consumerist culture.  If you can do this and then scale up your lifestyle only modestly as you grow your wealth, then you can be financially independent forever!

So how much do you need to be financially independent?

I leave it to you to decide but the guys I trusted above with a link both think that you can follow the 4% rule to know exactly how much you need for retirement. It basically says that you need 25 times your annual expenses (including investment taxes and fees) in order to retire and live off of an investment account without going broke over 30 years. Hence, if you can make an average 7% annual return and unlucky market timing and/or taxes eats up 3%, you can still live off of the return (4%). If you spend $40K per year for example you need $40K X 25 = $1M to retire. However, the average american household spends $57K per year. For more info on the 4% rule, check out my simple and in depth discussion on the 4% rule and how much you need to never have to work again. You may be saying thanks mr reasonable but I want to be rich not just scrape by. If so, this next post is for you: How Much Money Do You Need To Be Rich?