What's the Secret to Financial Independence?
By: Rick Kahler, CFP ®
Would you like to be financially independent? Most of us would. We'd like to enjoy a comfortable lifestyle without having to earn an income.
Recent studies suggest that an average income of around $60,000 is optimum for producing happiness. How much of a nest egg do you need to produce an annual income of $60,000 at retirement? Assuming you've invested for the long-term in a diversified portfolio, and assuming you maintain its purchasing power by limiting your withdrawals to 3 percent, you would need to accumulate two million dollars.
I need how much?!
That sounds like a lot, but building a two million dollar nest egg can be done if you start saving early by living on less than you make. A couple who starts contributing $10,000 a year to their ROTHs at age 22 and who stop making those contributions at age 29, assuming they invest in equities with an average annual return of 8.5 percent, will have a reasonable chance of having $2,000,000 by age 65. A couple who starts saving $10,000 a year in their ROTHs at age 29 and continues to save until they are age 66 will also have $2,000,000.
How do I do it?
The most common denominator among my clients who have accumulated wealth isn't the career they chose or the investments they made. It's their ability to understand, apply, and enjoy frugality.
I recently asked a self-made multi-millionaire to explain frugality. He responded, "How would you feel if someone paid you $180 an hour to walk?"
Then he told me this story:
Get paid $180/hour to walk
"When I travel on short business trips I usually leave my car parked at the airport. I got used to parking in the short-term lot because it's closer to the terminal than the long-term parking. The short-term parking costs $9 a day, while the long-term parking is $8. Many people might figure on short trips they could easily afford the extra $2 or $3 for the benefit of reducing their walk to the car.
However, a frugal person might wonder just how much that benefit would be. I figured out how long it took me to walk the extra steps from the long-term lot to the short-term lot - 30 seconds. Walking the same distance on my return makes my extra round-trip walking time 60 seconds. On a three-day trip, my total savings for this one-minute walk is $3, which adds up to $180 an hour.
To my brain, saving $3 seems trivial and meaningless, but being paid $180 an hour is significant. I'll sign up for that in a heartbeat. Now, I park in the long-term lot."
For a successful businessman to care about saving a couple of bucks on parking might seem silly or even miserly. But my friend's story is an example of a frugal mindset. Frugality is choosing not to spend more than necessary on things that don't matter, so you can spend on things that do matter.
Like saving for your future. Then someday, when you're financially independent, people can wonder why you think frugality matters.
Rick Kahler is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a flat fee. He is an author of four books on financial psychology and recognized by BusinessWeek magazine as one of the 15 most experienced financial planners in the nation.
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