3 min read
I like to think of my savings as a money machine. The investments in my 401(k), brokerage, and savings accounts all work to earn more money for me while I sleep. It’s a beautiful thing.
Unfortunately, my money machine is pretty weak at the moment. I have around $75k working for me. That’s enough for me to quit my full-time job and survive purely on savings for 3 – 4 years, but there’s a reason I’m sticking it out in Corporate America, at least for a bit longer: my money machine isn’t strong enough to grow substantially on it’s own yet.
Let me explain.
The Power of a Money Machine
Suppose I walk into my office and quit my day job tomorrow. Let’s also suppose that I cover my annual living expenses of $15k – 20k through tutoring, blogging, and freelancing. Here’s how my $75k in savings would grow over the next ten years at a 7% interest rate if I don’t touch it:
Suppose I got tired of working for myself after 5 years and I wanted to take some extended time off to travel. I would have around $98,000 in the bank. Over that 5 year time period my savings only grew by $23,000. That’s not much to be excited about.
The “power” of my money machine is it’s ability to grow by itself without any help from me. From year 1 to year 2, my net worth grew by $5,250. The next year it only grew by $5,618. It’s picking up speed, but not very quickly.
Instead, suppose I stick it out in Corporate America until I have $175,000 in savings before walking away. Here’s how my money would grow on it’s own in that case at a 7% interest rate:
From year 1 to year 2, my money would grow by $12,250 all on it’s own. The next year it would grow by an additional $13,108. Not only is my savings growing by larger amounts each year, but it’s growing at a much faster pace than the previous example.
If I got tired of my working situation after 5 years and wanted to take time off, my savings would be growing by more than $15,000 each year – enough to cover most of my annual expenses.
Here’s a look at the difference between the growth of $75k and $175k over ten years:
Notice how the blue curve is steeper. The $175k grows much faster than the $75k.
But as we know, earning 7% returns every year on savings isn’t always realistic. The market is much more volatile. Let’s take a look at how $75k and $175k would have grown since 2000 using actual S&P 500 returns:
It’s interesting to see that despite the market drops in 2000-2002 and 2008-2009, the $175k line never drops below $100k. Also, the difference in ending prices in 2017 is $255k, far more than the difference in starting prices of $100k.
As a young person, I’m naturally impatient. I want to quit my day job sooner than later so I can work for myself and spend my time on projects I find interesting. But first I need enough money in the bank that actually has the ability to grow substantially on it’s own, without my help.
If I were to leave my day job tomorrow with only $75k in savings, I could cover my annual expenses of $15k – 20k fairly easily, but my savings wouldn’t grow much without my help. In the future, if my expenses increase or I want to work less, I wouldn’t have a strong money machine to support my lifestyle financially.
I personally enjoy working, so I’m not looking to save $1 million by 30 and retire early. I think I’ll always work in some capacity. So instead, I want to build a decent-sized money machine as fast as possible that will grow on it’s own over time without my help. This way I can leave Corporate America as fast as possible without screwing my future-self financially.
By deploying some patience, I plan on continuing to save over 70% of my monthly income until I have a money machine that is strong enough to grow on it’s own, endure future market drops, and support me financially when I need it.
Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.
Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
Although the bulk of his net worth is invested in index funds, his favorite place to invest in individual stocks is M1 Finance, a site that allows you to build a custom portfolio of stocks for free.
His favorite way to save money each month on his recurring bills is by using Trim, a free financial app that negotiates lower cable, internet, and phone bills with any provider on your behalf.
His favorite micro-investing app is Acorns, a free financial app that takes just 5 minutes to set up and allows you to invest your spare change in a diversified portfolio.
His favorite place to find new personal finance articles to read is Collecting Wisdom, a site that collects the best personal finance articles floating around the web on a daily basis.
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