For the majority of people (I’m talking 80% +/-) approaching retirement age, myself included, many have regrets they’d like change if given the chance. One of the biggest regrets is how they saved when they were younger. For most Americans, the normal path is to get a job out of high school or college and start spending away – they feel suddenly rich and independent. Most young people look at their job as a way to buy things … there is little consideration for the future. Unfortunately, this is a habit that stays with people into their 30’s, 40’s, and 50’s. Their new car and clothes, high rents, and eating out destroy most of young people’s paychecks and the potential future wealth. I’m proud to say that my youngest daughter (D2) is not one of these people.
But, is the first $100,000 really a bitch to achieve? I didn’t have my first $100,000 until I was well into my 40’s. For me it was one elusive bitch. In fact, when I was 53, I had only $350,000 in my investment portfolio. But life happens – people loose their jobs, spending money on kids, have health problems, or an event knocks them down and keeps them down.
It happens to many (most?) people and it’s happened to me 2-3 times. I’ve been determined to not have my kids feel that sting, to make sure they had options, and to have them focused on financial independence.
In our family, when we say did you have “the talk,” we aren’t talking about the sex talk. For us, it’s the money talk. My kids have had hundreds of money talks with me. My wife taught the kids how to shop. We talk about value proposition, pulling in data/information to make a sound decision, and price is only one component of value.
“At 24, she just crossed the first $100,000 threshold!“
When it comes to money, my youngest daughter has done amazing things. She just turned 24, she’s been full-time at her post-college job for about 1.75 years. She’s turned a short lifetime of earning work money into a great (amazing) start to her financial independence journey. At 24, she just crossed the first $100,000 threshold. This threshold is what many “gurus” consider to be the hardest to achieve. And she’s done it soon after turning 24 with less than 2-years of working.
When my oldest daughter (D1) was 24, she achieved her first $50,000 and the path looked somewhat similar to Daughter 2 (D2). This story is about D2’s achievement at 24 when she hit her first $100,000.
The First $100,000 – Daughter 2 (D2)
When my two daughters were in school (kindergarten through college), rarely did we talk about grades. Our discussion focused on effort, approach, and support because we knew they were both smart enough to pull in good grades. The same goes for the money talk. We don’t talk much about retirement or buying things or “the number” she needs in her portfolio. We focus on financial independence (FI) and how FI can bring options and freedom of choice later in life. For her, it’s a leap of faith that this is a path that will enable future happiness. We also focus on the approach, which most people seem to not understand (or can’t execute).
She started her first post-college job (in the first few months of the COVID pandemic) by receiving an offer of $65,000 annually, which occurred in July 2020. She will likely make about $93,000 in 2022. Like I said earlier, most young people would see this income increase and use it to improve their lifestyle. Not D2, who chose to just save even more money.
“The intentional behavior of increasing her savings rate will make her wealthy.“
D2 is not a material girl; she values quality more. She likes her money but only for what money can do for her. She knows that money will provide her time for freedom and choices later in life. And she knows that with each purchase she makes it costs her time in reaching financial freedom. She knows that every $500 thrown away annually on “junk” purchasing means is over $60,000 less to her portfolio in 30 years. It’s really simple math and logic but it’s hard to see if that way when are eyeing the shiny object in the store or online.
She doesn’t have a FI number yet and it’s not necessary. Heck, she’s only 24 and she just achieved her first $100,000. For FI, she’s not thinking $2,000,000 or $5,000,000 … at least not yet. Once she hits her mid-30’s and she keeps on this FI path, I’d assume she will have achieved $1,000,000. When she does that, then we can start thinking about financial independence at 40, 45, or 50 and how much she might need to achieve that independence.
Savings Rate
Because COVID was in full swing, she spent her first year (2020) working from our home. She saved most of her 2020 work money and it gave her a great start to building her portfolio. She spent 75% of 2021 living out of the house and on her own. She lives with two other girls that she met in a new city and only pays $550 in monthly rent. That’s about $1,000 per month she’s saving over most people in rent alone. She doesn’t have a car payment (we gave her a used car) and she cooks most of her food at home. Those big 3 expense items – housing, transportation, and food – are completely under control.
Everything I just described in her spending has been the building blocks of her unbelievable savings rate. She values money. She values quality and is willing to spend on quality items when necessary. Brand name doesn’t matter but she balances quality, price, purpose, and many other things to determine if an item will be purchased.
Even if she only saves $43,000 per year going forward, she has her first $1,000,000 in about 12 years or when she’s 36. If she bumps her overall savings to about $55,000 per year, she’ll have her first million in 10 years (at 34 years old). So, if she makes more money at her job and she continues with a high savings rate then she’ll be well on her way to financial independence by 45-50 years old. Just wait until the compounding of these savings kicks-in … that will be fun to watch.
I told her the other day, if she can keep her savings rate above 50% then she’ll be set financially. But she also knows the better her savings rate the more likely she is to achieve FI earlier. Right now, her savings rate is the Number One thing she needs to focus on. Compounding will eventually grab hold of her earlier investments and financial independence won’t be too far away. Showing the savings rate first before the portfolio value is reinforcing the approach versus the outcome. Focus on the approach and the outcome will be achieved.
Portfolio Value
Sure, getting to $100,000 is an important milestone but it’s not something she focuses on. D2 is playing the long game, meaning that she is saving as much as possible without letting her current experience be reduced to staying at home every night watching TV. She likes going to concerts, traveling to new places, and seeing sporting events … all of which takes money. She has found a balance in how she saves but she wants financial freedom and the options that come with that freedom.
Her focus is on the things she controls like minimizing extravagant spending, eliminating unnecessary expenses, and her savings rate. It’s like a golfer strategizing how they want each hole to go but focusing on each swing. Have a plan – forward thinking mindset – but take care of the fundamentals that are necessary to achieve the goal.
D2’s portfolio is fairly simple – mainly stocks with an emerging real estate portfolio in focus. She just keeps chipping away. No major windfalls have occurred … she’s doing it the old-fashioned way. And I love her asset location too, which will payoff when she achieves financial independence:
- 35% Tax-Free Roth
- 50% Taxable
- 15% Tax Deferred
Young people should be putting every dollar possible into maxing out their Roth accounts. In 2022, D2 will contribute $20,500 to her company Roth 401k plus she’s already contributed the full amount ($6,000) to her Roth IRA. Our motto in doing this is “You have to be financially independent by 60 before you can be by 50.” The goal, max out all 401k and Roth IRA options first and should enable financial independence by 60.
Any excess funds go into her taxable accounts, which is exactly what D2’s been doing. It’s the taxable account that will allow her to be financially independent by 50 (or sooner).
NOTE: This $101,846 portfolio doesn’t include her $5,000 in short-term emergency savings and nearly $3,000 she has in her sinking fund (to purchase a car in 4-5 years).
Taxable Dividend Income
In D2’s taxable Vanguard account, she’s building a dividend stock portfolio that produces qualified dividend income. Currently, she has Johnson & Johnson, Exxon, British American Tobacco, and Unilever that will produce about $1,520 over the next 12-months. As we keep buying quality dividend stocks, this passive income will be part of the income puzzle she’ll need to be financially independent. Investment assets are important but you also need to create income and cashflow through those assets. Dividend stocks are one great (but not only) way to go.
D2 is also investing in growth-oriented crowd funding real estate that will shift to income producing later in life. Her Fundrise account is a great real estate starter investment and eventually she’ll start doing some syndicated deals through CrowdStreet or some other platform too. Passive income using real estate plus her stock dividends and other types of passive investments will produce the income needed in 20-30 years to live without the need for a job.
Taxable Stock Portfolio Breakdown
I like this taxable stock portfolio breakdown because it shows how important her savings rate is right now. Eventually, the green (capital gains) and blue (dividends) bars will dominate this chart. Just wait for another 20 years and the light blue will be the smallest bar on the chart. But the only way that happens is for the light blue (capital deployed) to lead the charge now. This is explained better in the section toward the bottom titled Some Things Get Better With Age.
When you’re just starting out (or playing catch-up like me), 20 or 30% returns are not the most important thing. Big returns only matter when you’ve actually got a chunk of money invested like a $100,000. Once you get some money invested, returns can start turning the bigger balances into something special … and that’s where compounding takes hold. Until that point, savings rate is always the most important things.
So How’d She Get There?
In April 2019 just after the NFL Draft, I put together an article titled You Are On The (Retirement) Clock. It listed the Top 10 things to do to get your financial self on track. Based on individual circumstances, the list allowed for some wiggle room in the order of your actions. So let’s see how’s she’s doing against the list:
- (YES & NO) Tracking expenses – D2 is a little inconsistent when she tracks her expenses. The good news is she’s using Personal Capital to track her net worth and expenses (sometimes). I suppose this is ok for now (given her young age) but she has a pretty good idea where her money is going. If she can track expenses periodically then she might see some trends. This is not something I could ever (so far) get D1 to do. D2 is living significantly beneath her means and we do keep an eye on her savings rate at least annually.
- (YES) Short-term emergency fund – She has ~$5,000 for short-term unexpected expenses. This is more than D1 (who lives in our city) but she lives in another state so it’s best to be cautious. She has also created sinking funds. One for a new car in about 5 years and the other for discretionary items like trips or experiences.
- (YES) Company Match In Tax Advantaged 401k – She definitely understands the concept of free money plus she maxes out her 401k. She is getting the full company match.
- (YES) Long-term emergency fund – Interestingly, we decided to put most of her funds $~25,000) into purchasing individual taxable dividend stocks (where she now has over $40,000). These are liquid and producing much more in dividend growth than she could ever receive anywhere else. She’s very employable, could drop her expenses to near nothing if necessary (for the moment), so I’m comfortable with this approach. This is one area that is very personal to each individual but she does have funds available, if necessary.
- (YES) Eliminate Credit Card Debt – She has no credit card debt (or any debt) and uses her credit card strategically and carefully.
- (YES) Tax Advantaged 401k – She is currently maxing out ($20,500 in 2022) her Roth 401k at work.
- (YES) Taxable Account – She has cash, individual stocks, and contributes to Fundrise real estate crowdfunding on a regular basis.
- (YES) Debt Free – Other than low monthly rent ($550), she has no debt and drives an 8-year old car that we gave her.
- (YES) Tax Advantaged Roth IRA – Even at 24, she’s already contributed 3-years worth of full contributions ($18,000) to her Roth IRA. As a single person, she also knows that if her income rises to a certain point that she might not be able to contribute anymore. So, she’s taking full advantage of the opportunity to contribute.
- (NO) Fee-Only Financial Planner – She has me guiding her for now but at some point in her life she’ll want to connect with a fee-only financial planner. For now, it’s pretty simple for her. Max-out 401k and Roth IRA contributions and contribute any leftover funds to her taxable account.
If I were to add another to the list of Top Ten things, it would be a savings rate over 50%. It seems high and I’m only going to start achieving it this year but it will enable financial independence well before most Americans. Really, FI is the only reach scorecard to consider. Big house, new car, and fancy clothes are only crutches to keep you working longer than necessary.
So, she has achieved 8.5 of 10 top actions from my list. For a 24-year old single person, I’d consider 9 of 10 a near-perfect score so her 8.5/10 shows she’s off to a great start. In fact, I can’t expect anything more from her at this point. She’s doing everything she can to save and I’m excited for her financial future.
Some Things Get Better With Age
The magic of compounding joins an exclusive club of things that get better with age. Whiskey, trees, antiques, cast iron skillets, and many other items become more valuable with time. Investments, given a chance to compound, become more valuable as time rolls forward too.
This first $100,000, especially at such a young age of 24, is so valuable with time. In 30 years, this $100,000 will become $1,000,000 (assuming 8.5%). This matters because she just needs to do this a 5-6 more times and her retirement is set. If she never put another dime into her investment portfolio, she’d have nearly $1,000,000 in 30 years. That’s over $900,000 of accumulated compounded interest and dividends. Very little in life is so sweet that this fact.
But why 5-6 more times? Because $1,000,000 in 30 years is like having about $400,000 today (assuming 3% inflation). If she wants to have $2.0M-$2.5M in today’s dollars then achieving 5-6 more $100,000 chunks ASAP will get the job done. She’s already focused on the next $100,000.
Remember, compounding is the greatest friend of a 24-year old person. In retirement, many are reaping the compounding of 30-40 years of accumulated poor financial habits. The saying that “you reap what you sow” applies with good and bad habits. My youngest daughter is reaping a solid path to financial independence.
Why Does This All Matter?
I was reading my normal overload of personal finance articles the other day and read an interesting article from iretiredyoung.net. The article did a nice job discussing why early retirement wasn’t only for rich and, more importantly, why retiring even 1-year early matters.
The exact numbers or percentages used in this chart aren’t what really matters but the concept means everything. The article uses the baseline that 67-years old is normal retirement and that retiring even 1-year early can improve your quality of life. Retiring 1-year early (from 67) not only increases your overall time in retirement by 6% but increases your active years in retirement by 13%. That is an important concept.
Daughter 2 is shooting for financial independence at 50-years old. But if she retires at 55 (versus 67), she will have increased her time in retirement by 71% and, very significantly, increased her active years in retirement by 150%. This is assuming she is a normal person with normal health conditions. This concept that she will have increased her active years, and she is very active, in retirement provides the reason or incentive to continue saving now. If she needed motivation then is chart provides the concept of why she she needs to stay focused on her personal finances.
If she every asks me “Remind me dad, why are we focused so hard on achieving FI?” this chart will part of my answer. We all get only so much life on this earth and our years of being active in this life is even more precious. Though I written a some articles on why achieving FI is important (e.g. FOMO on Life or FI By 50 is About Having More Options), everyone has their own reasons that will motivate them. What’s your reason for doing FI?
Summary
The important thing to remember about all this financial talk is that retirement is not the goal. The goal is financial independence. To me, retirement is for older folks. Now, if you retire earlier (like 55 or sooner) then the entire world of possibilities opens up to you. It’s at that point that financial independence brings choice and options. And if you “choose” to retire early so be it but that is a choice and you have the option to do so.
The whole concept of this blog (Tastes Like Retirement) is to get people to financial independence, whether that’s sooner or later. I don’t want anybody reading this to become another American retirement statistic. And focusing on being an average retirement statistic means you aren’t doing well because the average American isn’t doing well financially.
Sometimes it feels that we are too privileged or lucky to be doing well. Heck, doing well is not a crime and there is absolutely no shame in doing financially well for yourself and your family. The way I look at things is simple. The best thing I can do is for my family and I to do fairly well financially. Once me and my family are secure then I can turn my attention to helping others. It’s why when the oxygen masks drop down on a bumpy plane ride they ask you to secure your own mask first before helping those around you. Financially, I think the same holds true.
Don’t ever (EVER) feel shame for success (done in the right way) and don’t let anybody tear you down for thinking that. As for those yelling about people of privilege let them yell all they want. In nearly all cases, I’m talking 9.9999 times out of 10, somebody has more privilege over others. Even poor people in the ghetto have privilege over some others. Again, don’t let others make you feel shame for your success or financial independence. This is just the way life works and sometimes life isn’t always fair (certainly not when it comes to money).
Doing things in $100,000 chunks sounds better than telling a young person you need to save $5M to retire comfortably in 35 years. Remember, every $100,000 becomes $1M in 30 years so the quicker you save multiple chunks of $100,000 you will find yourself with $5M. That’s why the focus is on savings rate. Savings rate is most important for young people and older folks (like me) who are playing catch-up with their retirement finances.
Congratulations, Daughter 2, on achieving your first $100,000 in your financial independence journey.
Thanks for reading!
Mr. TLR