It All Has To Start Somewhere
In the last full blog we discussed a little about our income, where it comes from, and our philosophy in general, as well as some reasons why we feel we were able to get our income to over $200,000. In this blog we will talk about how income is really only 1/3 the equation to retiring early and what those other 2 parts are.
Somewhere along the way of arriving at this path of early retirement we heard the idea that there are only three things you can control when it comes to your finances, and although simplistic in nature, and obviously containing much more information within each category, it resonated with us because it gave us a place to start thinking about each category.
Income, Expenses, and Investments
The three are self-explanatory, but let’s think about each one and HOW we think about them in the context of early retirement.
As we hopefully conveyed in the last blog, we are driven, but not so driven that we are willing to sacrifice our “lives” to chase the almighty dollar. Because of this we use a lot of our daydreaming about ways for us to increase our income (anything is fair here… there are some quirky ideas we have… as does the internet) then we discuss how this would impact our lives for better or worse, risks associated with it (financial and lifestyle), and if the juice will be worth the squeeze so to speak. Some things we have found to be great ideas, just not great for us because of how much time will be spent making an extra $20,000 or so etc. And with many things, which we will share in the future, the timing just isn’t right for us.
At the end of the day income is something you CAN control though. We believe very strongly that we live in a land of opportunity, and that some people choose to squander that opportunity. So, if your income isn’t high enough, it is very import you sit down and figure out how much more you need to make in order to make you happy, and come up with some ideas on how to get there. The other two categories will have far less power if you don’t have an income that supports them.
We will be sharing some “case studies” with you in the future of examples within our personal lives of individuals who constantly complain they will “never retire” and “never have any money to do anything”. These same people often post online about their brand-new phone, new cars (impulse buys sometimes!), upgraded house, go to the spa every week, and brag about every appliance they just bought. The bottom line is their expenses are OUT OF CONTROL. We are by no means the expense police, for crying out loud we just bought a pool… On CREDIT… but as a therapist Rory will explain his feelings towards the culture we live in and how it impacts our consumerism and the perpetual feeling of need for people to purchase things. The nuts and bolts of this is that most people spend EVERYTHING they make, regardless of how much they make (We know people who make $300,000+ as an individual and spend nearly as much every year) or they spend MORE than they make (A very large portion of the United States population spends 1%-2% more than their income per some sources). The moral of this part of the equation is that no matter how much you make, if you spend it all, you will NEVER retire and will be a slave to the NEED to continue to make money to support your lifestyle.
This seems to always be the part that everyone jumps to when they first start down this path (us included) it’s the sexier part of the equation, but let’s look at that equation.
A= Your family income
B= Your total expenses (including taxes)
C= The left over you can invest
Let’s look at two examples to illustrate why the first two are way more important than investments.
$70,000 (Family Income) – $68,000 (Spent for the Year) = $2,000 (Investable Income)
We aren’t going to go after a family that manages to come up with $2,000 for the year and ACTUALLY invests it (no, upgrading your car is not an investment) but obviously, their dreams of retiring early, regardless of what investments they choose, are FAR FAR in the future if they can’t figure out a way to have more per year to invest.
$100,000 – $68,000 = $32,000
Now we’re talking! $32,000 a year of left-over money is some serious investment… Notice that the only thing we changed is their income. This represents two very important factors. The first being that this family found a way to increase their income by 30%, no small task but easily achieved by the motivated family. And the second and the most important factor is that their expenses stayed the same. Arguably this is the more important factor since what do most people do when they make more money? You got it, they SPEND more money! You see, most families’ equations would look much more like this $100,000-$98,000= $2,000. They increase their cost of living along with their newly found income. They get caught in that income and expense cycle that never gets them any closer to being wealthy.
Investments (Seriously this time)
Did we get our point across in that last part? Your investments really don’t matter if you don’t have any to make. Your time is much better spent getting your income up and your expenses down AT THE SAME TIME. That’s the only way you will really be able to retire!
Most people follow roughly the same investment strategy that we are (Yep, we stole it!) The key is investing into tax deferrable retirement investments first to get the most bang for your buck, and then investing in stuff that will allow you to retire early (rental units, index fund etc.) In the future, we will talk about the mechanics of how to calculate how much you need for retirement, the different types of investments out there, and from our unprofessional perspective, the pros and cons to them all.
Wasn’t That Simple?
That’s it folks. Three things you can control. Ask yourself as we did in the past year “What can we do to increase our income?”, “Where can we spend less money?” (One of our goals for this year in tracking our expenses), “What would I invest in if I had the money and why?”.
Seriously, get out a piece of paper, have a discussion with your significant other, and figure those things out because until you do its all pie in the sky.