Why a million budgeting tips will never be enough
Any simple search in Google will show you that there is no end of budgeting tips out there. You need to figure out how to pay for a wedding? The first 30 searches results will show you 1 tip per minute of your engagement? What about how to pay for college? There are literally hundreds of consulting firms out there designed to make sure you not only get in, but are able to afford it. And what about the traditional household budget? There are thousands of blogs out there with millions of budgeting tips, all of which are designed to make sure you keep a little more of your paycheck then you did before you read the tips.
Unfortunately, you’re never going to budget your way to wealth. Well, at least not my definition of real wealth.
Now, don’t get me wrong, I’m not saying budgeting is a bad thing at all. In fact, having a basic understanding of where your money is going is a huge part of a financial plan. But please don’t think that your finances are going to be all set just because you’re saving ten percent a year, because it’s not.
Nope, folks. All the budgeting tips in the world aren’t going to guarantee that you can retire early.
Don’t believe me? Watch and learn, my young padawan.
Budgeting tips won’t save you. Here’s why.
So let’s just say that you earn the median income of the United States, which is right around $52,000. Now, most people can save at least 10% of their income, so let’s say, in an ideal world, that we’re saving $5,000 a year.
Not bad, not bad at all!
But let’s keep going. Let’s say that you’re actually a pretty high income earner for your age group, and you start earning that much at 25, and stop working at 65. And let’s say that you get a $2,000 increase each year. After adjusting for 3% inflation, that leaves you with 1.2 million dollars.
1.2 million. After consistently saving 10% of your income for 40 years. That’s what your left with. In today’s dollars, you’d have, at most, $50,000 living off the interest of that sum. Throw in some Social Security, and you might get that up to $65,000. But let’s call it out for what that it…
That’s not rich. That’s comfortable.
AND that’s assuming some really ideal conditions. We’re talking not having to raise kids, not spending $25,000 on a wedding, no gargantuan medical bills, no down payment for houses, etc. Of course, you could raise how much you save. 20% would have you clearing over $100,000 in retirement. That’s certainly much more comfortable, but that’s still not “rich”.
And I’d argue that the amount of discipline that it takes for someone to save 20% of their income for 40 years doesn’t lie in the heart and soul of everyone.
Ah, but what if I save way more?
After all, there are people out there that are saving a RIDICULOUS amount of their income. There’s this anonymous couple from Boston that’s saving 70% of their income. Or these guys that are saving 50% or more of their income. But here’s the thing you have to keep in mind.
- These guys are not saving half of the average income in the US. They’re saving half of a much larger chunk of change. It’s a lot easier to save half of your income when you’re making over six figures than when you’re scraping by on $50,000 or so.
- They’re not doing it for a long time. This is not saving 70% of your income for decades. In fact, most of the people I know that are saving this amount of their income for less than ten years.
- They’re living off an incredibly small income after they do “retire”. These are people that are living off boats as they travel and have super small living expenses. While they certainly seem to be living fulfilling happy lives, I wouldn’t categorize them as “rich”. These guys aren’t hanging out with Gates and Buffet.
- This is rather untested waters. I haven’t been able to find anyone that’s lived off a decades worth of extreme savings funds for multiple decades. In fact, most of the couples I’ve read about that do this are still pretty young, have no kids, no house, no commitments. I often find myself wondering how long these people and couples can live off the funds they saved. Or, how long they’ll WANT to continue with that lifestyle.
Listen, I’m not saying that this technique doesn’t work for some people. The thought of socking money away like a squirrel does nuts for the winter so I can spend a couple of years traveling the world on a boat sounds hella appealing. But I don’t know that it’s for everyone. Or even a minority of people.
Ok, I actually think that 99.9% of people are not going to do that. I want Starbucks. I want to have a Moscow mule and not feel guilty. I want to buy nice things for those I love, because, well, otherwise they might realize what a dick I am…
So what are you supposed to do instead?…
One thing would be to make sure that the investments you’re making are going to give you some serious results over the long-term. And while boring index investing is absolutely a legitimate way to build wealth, if you’ve got a longer time horizon, you should be reaching for higher returns with small-cap index funds.
And while a 10 year time horizon might be a pretty short time horizon if you’re investing in small-cap index funds, it’s important to realize that you’ve got to do something a little different if you want more than just “comfort.”
Channel your inner Jobs…
I know I’ve said this before, but that’s only because I think it’s true: the real way to financial independence is through entrepreneurship. Having a side income that’s scalable, operates in a niche, and could be run from anywhere in the world is going to be the key to make sure that you’ll have income that allows you to do what you want, when you want. And for most people, it’s easier to set up a business that achieves this than trying to save your way to riches.
Think about it. If you had five years to set up a business, don’t you think you could create one that allows you financial freedom? Or at the very least, the income from that business would be more than the income from the amount you would have saved?
Starting your own business is a million and a half blog posts in and of itself, so I’m not going to go into it here, but think about it: it’s so much easier to earn your way to riches, as opposed to saving and hoping your way there.
Why a million and one budgeting tips will never be enough – The Wrap Up
Even if you’re an above average earner, saving your way to riches by socking away 50-70% of your income really isn’t practical. You have to be an above average earner, AND be disciplined enough to put that money away, AND do it for years on end, AND be able to drop your living expenses for the rest of your life to a point where you’re not going to burn through the cash you spent years trying to save.
So while budgeting is a great way to make sure you’re maxing out that IRA, or that you have enough to head to Paris this summer, or guarantee you have enough for that Mustang you’ve been eyeing for years, it’s not going to get you to be this guy:
So obviously a budget is important, but do you really think it’s enough to get you to reach your financial goals? Are you financial goals just to be comfortable, or do you want more out of life? Are you willing to trim all the fat off your budget in order to retire decades earlier? Even if that means you don’t get to retire with as much as others do? Comment below!
Keep trying to crack the code,
Paul AndrewsFollow me on social media!