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.
My favorite free financial tool I use is Personal Capital. I use it to track my net worth, manage my spending, and keep an eye on my monthly cash flow. It only takes a few minutes to set up and it makes tracking your finances simple and easy. I recommend trying it out.
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