I’m not usually one to regret decisions or actions but I do care about learning from them. Most of my regrets would be on making poor “investment” choices. I put “investment” in quotes because they weren’t investments … they were junk companies that lost me thousands of dollars.
That said, if I were a younger version of me then I’d be preaching to myself over two items: (1) having (and keeping) a high savings rate and (2) doing so early in my life. Unfortunately for my kids (or is it fortunately?), they are starting to hear me talk over and over about that concept.
They keep hearing me talk about being financially independent by the time they become 50 years old. I don’t talk about retiring at 50 but being financial able to do so if they desire. My story to them contains a study that found nearly 60% of people over 50 years of age involuntarily lose their jobs. They also hear me say that only 10% of those 60% will get back to their prior income level.
That statistic is a warning of a reality that I’ve escaped (so far anyway). My job loses were earlier in life (30-35 years old) so I had time to recover. It’s why we were basically broke once I started working for my current employer. But those job loses were devastating to my financial well-being. It would be even more crushing if it happened later in life and I was a late saver.
So, this article is about Zan and Jayna, DC Comic siblings from the planet Exxor and members of the Super Friends. Zan can transform into water while Jayna can transform into any animal.
The pair can activate their superpowers by touching hands and saying the phrase “Wonder Twin powers, activate!” Well, in this article they will activate the Wonder Twin powers of a high savings rate and do it early in life so that compounding can do it’s magic. You can do the same.
Transform – High Savings Rate!
I’ve written often about the power of a savings rate, actually calling it the Secret to Building Wealth. There have been articles and studies done in the FIRE community on this very subject. Several have linked a person’s savings rate to the speed by which they can retire. Mr. Money Mustache wrote a famous article in 2012 explaining the simplicity of the math.
For my daughters to reach financial independence by 50 years of age they need a savings rate of at least 30%. That means they will have 28 years from the time they start saving until they reach age 50. It’s hard to do when life comes at you hard with altering events (job loss, kids, etc…). A lot of life can happen in 28 years so it’s a real accomplishment, especially if you don’t have a high income.
“Transform into someone with a high savings rate!”
Zan activating into someone with a high savings rate
I usually recommend starting kids at 20% so they can get their new life expenses under control. Then they can increase it aggressively until they reach at least 30%. If you are making more money then start off by saving more. My oldest just turned 26 and she’s saved $75,000 on incomes between $45,000-$57,000 per year.
It can be done but you need to stay employed (my issue between 30-35 years old) and focused. Having a spouse or partner that works should help too. I’ve heard people say we’ll live off one person’s income and save the other. Whatever system works for you is great but have a plan and stick to it.
When your friends are going to Europe each year or buying a big house or fancy new cars, it will be tempting to keep up with them. But let’s remember what the true sign of success really is … financial independence. The winner isn’t the one that buys the most things – that’s just not how it works.
True life success is when you can handle a job loss when you are over 50 and you choose to either retire or write that novel you always said you’d do. Again, choice is the true measure of success. You will have choice while your friends and co-workers will be at the mercy of their employer and paycheck.
Transform – Save Early!
I don’t write a lot about starting to save early and the magic of compounding but I should. My blog is focused on my journey and the only thing I usually write on the subject is about my regret of not starting to save earlier in life.
Last week, I was watching YouTube videos on RV’ing and each one said “your RV will break down” or “something will go wrong.” The same can be said for life … something will likely go wrong. You’ll loose your job or have a medical issue that really upsets your plan.
“Transform into someone that starts saving at a young age!”
Jayna activating into someone that starts saving early in life
Well, your biggest defense against something like this is a strong savings rate and starting early.
I showed this compound interest picture to my youngest daughter (age 23) and she said “It makes total sense.” It’s so logical and simple, yet it’s so hard for people to accomplish. If it’s so easy why do American’s have such horrible retirement funding? The answer to that question is because we are consumers and you have to break that habit. We have to:
- Execute – create then execute on a plan to save and start early, meaning be committed to the plan
- Trust – you have to execute your plan and then trust the process, trust that you’ll get there, trust that it’s worth doing this versus desiring to keep up with your neighbors
- Be Lucky – no job losses, medical issues, divorce, or other significant life events that can drain your assets
But What If We Start Late?
If we don’t start early (like me) then we still have some good things going for us. I’m in my prime earning years and we are empty nesters. We can make catch-up contributions since we’re over 50, and I’ll only need to fund only 25-30 years of retirement versus 50+ years (as many early retirees have in front of them).
Also, I’m more confident than younger people that social security will be there for me. And biggest of all (for me) is that some of us late-savers might just have a pension waiting for us.
A late-approach is unnecessarily stressful compared to being financial independent by 50. My financial journey could have been much happier. Instead, I’m trying to jam as much savings and debt reduction into my final working years as I can possibly stand.
I’m backloading my financial independence and that is risky. Like I continue to say, nearly 60% of people over 50 lose their job and only 10% of those people ever get back to their high income earnings. If I had to do it over again, I’d take the easier route.
Summary
It was silly using the Wonder Twins to show how a high savings rate plus saving early in life can be so powerful. But I’m trying to reach people from all different angles and these are two financial actions I didn’t do in life.
I’m having to use my higher income ($250k+) to make up for my “early in life” lost opportunity. And if I didn’t have a pension to fall back on then I’d be in real trouble. The lessons of this article are aimed at my kids and anyone that is young. They have such a great opportunity and I want to make sure they understand this is life changing for them later in life.
Thanks for reading!
Mr. TLR