Part 2 of 2.

I do want to give you a fair warning! You may feel unsettled, after learning how this applies to you.

Recap

In the last post, I shared with you my early experience with career success; and a major obstacle that I was unable to eliminate.

I was working way too much and felt trapped. My major essential expenses were increasing, while my general consumption was decreasing. I didn’t see how I could take a pay cut, in order to work a more balanced amount of time.

My major essential expenses included property taxes, utilities, and groceries. Each of these expenses were increasing.

After a ton of research, I recognized that there were too many variables. All of these variables were beyond my control. So, I decided to focus on investing my discretionary income. My hope was to change circumstances, as soon as possible.

Next Steps

Like any new investor, I wanted to project my future net worth. I wanted to see how long it would take for returns, on my net worth, to finance a moderate lifestyle.

Since it’s common for people to stop working between 60 and 65 years old, I projected the cost of my current lifestyle out to age 65. I used the 2.5% average inflation rate, over the last 30 years. The projection showed that I would need to earn 176.46% of my current-lifestyle-costs. If I account for, say, a 30% effective tax rate, then I would need about 250% of my current costs.

How much money would I need to invest each year, so that I could cover future living expenses? Also, did I have enough time to meet my goal?

Signs of a Potential Problem

I used an average after-tax, risk-adjusted Return-On-Investment. That ROI worked out to be 5%. That revealed that I need about 20 times my future-lifestyle-costs. My net worth would need to be a minimum of 5,000 times my current-lifestyle-costs.

That seemed like a lot of money!

Nonetheless, I knew how much my net worth needed to be. I next needed to figure out how much to save. I used the same conservative ROI of 5%. 

I could not believe it! I double, triple, and quadruple checked the number. I asked two friends, who were financial planners, to look at it. There were no mistakes. I had to save more than 85% of my current-lifestyle-costs.

What Does This Mean?

HOW IS THAT EVEN POSSIBLE?

This meant that if someone currently spends, say, $50,000 per year on their life-style-costs, that they would need a net worth of $2.5M dollars to cover their future life-style-costs.

If we use a conservative rate of return of 5%, and they are the same age as me, and they plan to stop working at 65 years old, then they need to save $42,000 per year.

My dollar figure is much higher. I needed to figure out how to invest 85% of my current life-style-costs every year. That pales in comparison to the 10% or even 20% we are told to save and invest for the future. Those numbers are not even close to what we need to fund our future lifestyle, through passive income.

If I only invest 20% of my income, my future net worth is only one-third of what it is supposed to be. That means that it could only fund one-third of my current-lifestyle-costs.

Can you imagine living a lifestyle that is one-third of your lifestyle today?

Exploring Options

I needed to figure out how to save and invest way more than the conventional 10%-20% target.

Although I could increase the rate of return, by finding alternative investments, it seems to me that very few people are ever able to pull this off. I first wanted to identify options using the more conservative 5% ROI.

So, what options did I have available to reach my goal?

OPTION 1 – Although working more hours in a day, for another employer, was one option, I was opposed to it. I wanted a better balance in my life.

OPTION 2 – Asking for a raise, which let’s me save and invest more, was another option. But this option takes time; especially because of the amount of extra money I needed to invest each year.

OPTION 3 – Settling for a future lifestyle, which is much less than my current lifestyle, was yet another option. But, that was not an option I could accept.

OPTION 4 – Making more money, as an entrepreneur or business owner seemed the most reasonable to me. This might be a good choice if your circumstances are similar.

Option 1 requires working longer hours for a few decades. Option 2 takes too long. Option 3 is unacceptable. Option 4 does require working more. But if option 4 is done right, it can be achieved in less than a decade.

Becoming an Entrepreneur and Business Owner

My guess is that there are many people who have circumstances like this. If this seems like you, then you may find yourself reflecting on, “what all of this means for your future; as well as what you need to do.”

If you’ve been thinking, on and off, about starting a business, then you may want to spend time thinking about, “how much you may need to invest each year, in order to achieve your own goals.”

If you want to compress your time line, then there are not many choices to accelerate a significant increase in your net worth.

By becoming an entrepreneur or business owner, you give yourself the opportunity to generate hundreds of thousands of extra dollars, each year. Your business doesn’t need to produce millions of dollars to live as well as you live now, but in the future. A few hundred thousand dollars, for the average person, in the U.S., might be just enough.

The Future

If you are fortunate, have applied yourself in your career, and have advanced, then your discretionary income may be enough to finance your entrepreneurial and business endeavors.

If you have not advanced in your career, you can still pull this off. But, you’ll have to really apply yourself this time around; and make up for any time you’ve lost before.

Below you’ll learn how to evaluate, for yourself, your own situation!

End of Part 2!