- You would think that
the most important number in personal finance
is the amount of money that you need
to be financially free,
that way you can quit your job
and just live off your investments.
But I have some news for you, it's not.
While that number is definitely important
it is not the most important number to focus on
while you're working towards it.
I'll show you what number is the most important to focus on
and how it can transform how quickly you get
to that one million, two million, three million,
or whatever dollar amount it is
that you need to reach financial independence.
When Theodore Roosevelt was 18
going into his sophomore year of college,
his father gave him a piece of advice
about his future and money.
You see, up until this point,
Theodore was a very accomplished naturalist
since he had been studying animals in his free time
for the better part of 14 years.
By this age, his collection of birds and skins
were in the hundreds,
and he knew more than most professionals
about things such as bird coloration, courtship, flight,
and the sounds that they made.
He knew a lot about many different animals
but this boy was absolutely obsessed with birds.
His father, Theodore Senior
was an accomplished businessman
so he wasn't very encouraging of this path as a profession.
But he was not interested in guiding Theodore
away from what he truly wanted to do.
Back then, science professions weren't very lucrative,
so his father sat him down to give him a piece of advice
that he would always remember.
He said, that if Theodore was not going to earn money
he must even things up by not spending it.
His father expressed it like this.
You need to keep the fraction constant
and if you are not going to increase the numerator
then you must reduce the denominator.
In other words, if Theodore went into a scientific career,
he must definitely abandon all thought of the enjoyment
that could accompany a money-making career
and he must find his pleasures elsewhere.
What it came down to is trade offs.
Theodore had to make trade offs
when it came to where he spent his money.
Now, I don't want you to get the idea
I'm implying that you can't spend money on things
that you enjoy.
You can, and I think that everyone should
to a certain extent if they choose.
And later in the video, we'll even talk about how to do that
without making yourself feel guilty,
but figuring out where that line is for you
and understanding how it plays
into hitting whatever amount of money that you need
to be financially independent is very important.
Roosevelt's father was basically telling him
to pay attention
to the most important personal finance number
that will move the needle, his savings rate.
It's a simple math equation
where you take your net income after taxes
minus the money that you spend on your living expenses,
then divide that number by your net income.
If your income is $6,000 per month
and you spend $5,000 per month,
then your savings rate is 16%.
Ideally, this leftover money is going to go
towards income producing investments
like broad-based traditional index funds
or ETF index funds,
like the ones that I've made videos about in the past,
real estate, or whatever else that you decide.
This isn't money that's just left over
for you to spend on Cheetos,
or I don't know, terrible paintings
the neighbor kids were selling door to door
that you bought anyways
just to support their entrepreneurial spirit.
This is money that needs to be put to work
so that you are able to have more free time
to do what you want in the future.
I need to address the elephant in the room for a minute.
How can your savings rate be more important
than investment returns?
Because the more money that you have invested
the more dollars you'll receive in returns.
If you have $100,000 invested into index funds
and I have $50,000 invested into index funds
and we both get the same 7% annual return,
then you are naturally going to have more dollars than me
because you had a bigger nut than I did.
Your energy and focus is better served
going towards things that you can control
like your savings rate to get that nut number a lot higher
as opposed to things that are outside of your control
like investment returns.
Buy your low-cost index funds and move on with your life.
I'll show you how much increasing your savings rate
can change how quickly you reach financial independence.
But before I do that,
we need to talk about the two factors
that go into your savings rate,
your income and how much you spend.
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If someone makes $60,000 and spends $60,000,
then one thing we know for sure
is that they're never going to be financially independent
before the normal age of 67
because their savings rate is 0%.
I would go as far as saying
that a savings rate of 20% or less is unacceptable
if you wanna have any chance of reaching FI
at a reasonable age.
Which means that we first need to focus on
the expense side of the equation
because the less that you need to live on,
the less that you need to have set aside
to be financially independent.
Just to give you some numbers,
to understand the power of cutting
even just a little bit from your expenses,
$100 a month cut from your expenses
would equate to $40,000 less that you'll need set aside
to withdraw from to be financially independent.
I respect the people who like to take these
super frugal path to this whole thing,
but I personally have no interest in promoting frugality
to the point of telling you that you need to cut
all of your expenses down to the bare minimum.
Once again, that's just my opinion.
Do what you want.
I'm pro spending money even above average money
on the things that you enjoy
and especially on things that will improve your life.
But we do have to recognize
that spending above average money on everything
isn't sustainable
if you're trying to become financially independent.
This is why I promote the idea of spending money
on a few things that improve your life
than cutting out all of the other BS
that you think improves your life, but actually doesn't.
It's not an easy thing to do at first
because let's be honest,
if it were easy to do
then everyone would have a high savings rate
and everyone would be FI before the age of 67.
For me, I'll spend out the but
on health-related products and services
because that is extremely important to me.
Mental health stuff like meditation apps
and other things that I can't talk about on this channel
but I can on my podcast,
which I'll have linked up down in the description.
I have no issues spending on high-quality food
and I'm about to drop a couple thousand dollars
on some tests just to review my overall health.
But the reason I can do that
while keeping a high savings rate
is because I cut back on other things
that just aren't important to me.
I don't have a super nice car,
even though I could've afforded one
that's at least three times the amount that I spent.
I don't have a big expensive house,
even though I could've afforded one
that was three or four times the price I paid.
And this is the case with many other expenses in my life.
Being able to cut back a little bit on the big three
are where you're going to see
the biggest improvement in savings rate.
I'm not here to try to preach to you
about how you need to cut this and that from your expenses
because I'm not you and you're not me
so we value everything completely differently.
If you're not sure how to figure out
which expenses need to be cut,
then just write them down and rank them.
Start at the bottom and then work your way up
to completely remove or drastically reduce items
that you see fit.
Ideally, you want your spending to align with your values.
The Stoic philosopher Seneca phrased it like this.
"You ask, what is the proper limit to a person's wealth?
First, having what is essential,
and second having what is enough."
The key part of that is getting the target
to stop moving enough
so that you can determine what is your definition of enough.
Once again, I'm not your daddy because that's creepy
and you are an adult
so you figure out those details for yourself.
But one of the biggest realizations that I came to
when hitting a personal savings rate of 83%
is that you can only save so much money by cutting expenses.
At some point, your quality of life is going to suffer
which is what you want to avoid
and why I think extreme frugality doesn't work
over long periods of time.
It reminds me of the old Japanese saying,
when you have won a victory
tighten these strings of your helmet.
Don't continue pushing frugality
to more and more extreme levels
after you find a comfortable spot for yourself
because it'll end up having the opposite effect
and leave you leading a very miserable life
on your way to FI.
Too much force creates a sort of counter reaction.
To hit the higher levels of savings rates,
you'll need to put a lot of focus on increasing your income.
If you take home $100,000 per year and you found that
the sweet spot of spending for you is $70,000,
then your savings rate is 30%.
Pretty darn good in my opinion, but we can always do better.
If you wanna level that up,
then all of your focus needs to be put on
making more money.
That way, you can go from an income
of $100,000 to $110,000
so that your savings rate gets bumped up to 36%.
I think nowadays making more money is a lot easier
than most people are willing to admit.
Between getting a promotion at work, bonuses,
getting a new job that pays more,
or doing some sort of side hustle,
there's a lot more avenues
than what someone like Theodore Roosevelt
had available to him back then.
If that boy was around today then he would for sure
be the Mr. Beast of bird-related YouTube channels.
The more difficult part is the behavioral side of things,
not allowing your spending to increase
at the same rate as your income.
One of the best savings rate hacks
that I found that helps fight against this
is never getting a raise from work.
Now, I promise I'm not going crazy, so let me explain.
I went at least six years without getting a raise at work.
Now, technically on paper, I got many raises and bonuses,
but in my head and in my lifestyle, I did not get a raise.
My overall net worth got a raise
because every time that my salary would increase
I automatically increased the amount of money
that I was investing by that same exact amount.
Lifestyle creep beyond a reasonable level
was basically impossible
because I completely forgot about it.
I think this is why we see stats like,
48% of consumers earning more than $100,000 annually
who live paycheck to paycheck.
Every time most people make more money,
they think that they have to go spend it all.
It's why I heard about someone the other day
making $250,000 per year with $0 saved
and barely getting by in an average cost of living area.
It's also why I know a couple that used to combined,
make $650,000 per year and now they're bankrupt
and they can't afford to buy a home.
Making more money can be extremely powerful
as long as you don't act like a spoiled brat
who thinks that they deserve to spend more and more money
as their income increases.
You work very, very hard for your money,
so you deserve to do what you want with it,
but you also have a responsibility to not squander it away
because you are letting your
emotional five-year-old self take over.
Always remember that the today you
has to take care and look out for the future you.
Now, it's time to show you the real power
behind increasing your savings rate
that'll probably resonate with you a lot more.
Instead of measuring the result in dollars,
we're going to measure it in how many years
until you can be financially independent.
Just so we're on the same page,
here are my conservative assumptions
when calculating this number.
I'm assuming a 7% annual return on investment
and a 3.5% withdraw rate.
Now, these numbers are all after taxes and inflation.
A $100,000 income and 30% savings rate,
you would be financially independent
with the option to retire in 25 1/2 years.
Increasing your income to $108,000
would bring your savings rate from 30% to 36%,
and you would be financially independent three years sooner,
so that's 22 1/2 years.
We're going for those big leaps though,
so let's say that your significant other
got a higher paying job
or started making more money from a side hustle.
If you were able to bump up your income to $138,000 per year
and continue to live on $70,000 per year
then your savings rate would skyrocket to 50%.
That would mean your years to financial independence
would go from 25 1/2 years down to 16.
Keep in mind, these numbers are only based on
if you increased your income.
If you decided to reduce some of your expenses
even by a little bit
without destroying your quality of life of course,
then these numbers would change drastically.
No matter what though, you should continue to push
to make more money every single year.
If you aren't, then this is a problem
that needs to be fixed as quickly as possible
because time is running out.
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Then check out the description of this video
for additional resources to help you
with financial independence, investing,
and ways to help support my dog Molly,
and this channel as well.
I'll see you in the next one friends. Done.