The Creator’s Path to Financial Independence: Part 1

Welcome to the first financial post of the C&C blog.  If you remember back in the ‘What is a creator?’ post I left a teaser about the incredible financial benefits of adopting the creator’s approach to life.  Now that I’ve finally had time to get around to our first post in this area, the best way to start is with an example.

Two people graduate from college at the age of 22.  Let’s call them “Creator” and “Consumer”.  Both have the exact same degrees and live in areas with similar costs of living.  Both get jobs and have a household starting income at $51,000 dollars a year (Just below the nation’s average household income).  Both work at companies with 401k plans that will match contributions up to 3% of their monthly wages.  In fact, there are only two differences between Creator and Consumer.  1) Creator’s creative, proactive, passionate, and grateful approach to life makes him a more valuable employee and he is rewarded with an average of 2% better raises per year than Consumer.  2) Creator lives to the budget listed below (adjusted each year for inflation) and saves the rest while Consumer simply saves 5% of his gross income (which is about the average American savings rate).

To recap, Creator’s budget and other calculation assumptions are below.  Although Creator's budget is modest, it is still more than $1,000 per month above the Federal Poverty Level for a family of four. 

Creator’s Monthly Budget
Food / household goods	$400
Car / Gas	$200
Clothes	$50
Internet	$75
Phone	$100
House / Rent	$900
Student Loans	$300
Healthcare	$200
Incidentals / Fun Money / Vacations	$300
Utilities	$300
Car Insurance	$120
Total Annual Budget	$35,340

Calculator Assumptions
Assumption	Creator	Consumer
Starting Household Income	$51,000
Annual Average Raise / Promotion	6%	4%
Effective Tax Rate	10%
Inflation	2%
Savings Growth Rate	8% *
Pretax 401k limit	$18,000 per Earner
Financial Independent Mark	25 times (cost of living)**
Savings Approach	Saves everything above his budget  (plus 3% company matching)	Saves 5% of income (plus 3% company matching)

*S&P 500 long-term growth rate reinvested dividends is ~9.8% so this is reasonable for an example

**We’ll talk about the 25X rule in later discussions; but for now, see what the MadFientist has to say on the subject

Now, the assumptions above are everything we need to see how our two friends' savings accounts progress.  I hope you find the results as astonishing as I did when I first started crunching these sorts of numbers.

*Note that the upward slope of Creator's Financial Independent Goal is due to assumed 2% inflation

From the chart above, you see that creator reaches complete financial independence right around his 39^th birthday.  What is financial independence? It is the point at which your investments are actually growing faster than you are spending, even when very pessimistic markets and inflation are accounted for.  I’ll post more on this topic in the future, but for now, we use the 25x rule.  The 25x rule is simply a guideline that says that once your savings account reaches your annual budget multiplied by 25, you can literally live off your savings for the rest of your life!

Across the internet you often hear of people hitting this magic number and leaving their desk job behind a.k.a. “early retirement”.  In fact there is a full movement called FIRE (Financially Independent / Retired Early) sweeping the nation.  I prefer the term 'financial independence' because a creator would never spend his days relaxing in front of the TV and turning in early.  Creators pursue financial independence because there is naturally no better place for them to be.  Imagine being able to provide value to the world around you without having to worry about the monetary reward.

The common response I get when I bring up the concept of financial independence is “I would never leave my job before my 60s, I don’t know what I would do with myself”.  I have to ask, is there really nothing you would do differently at work if you literally didn’t need the money? While you think about that, I’ll play out the same scenario above, only allow our two friends to both work until they reach age 62...  

 **I capped out Creator’s salary after age 45 so that he doesn’t have infinite salary growth potential

  

Looking at Creator’s savings working until 62 shows some real returns.  As the Reverend Dave Ramsey would say, “That starts look’n a whole lot like thirteen and a half million dollars” (you’ll have to imagine the Tennessee accent).  We also see Consumer is approaching the grey line, but remember, Consumer is accustomed to spending all of his now six-figure salary, so there is no way he can quit his job.  Consumer meets his financial independent mark at age 83 (using the 25x rule), which is (as the Reverend Mr. Money Mustache would say) “...exactly the same as never”.

By now you have a million questions… at least I hope you do.

·      What is a retirement account? (IRA / 401K / Roth, etc…)?

·      What about taxes and early withdrawal penalties on retirement accounts?

·      What about social security?

·      What about healthcare if I leave my day job early?

·      Is the 25x rule really good enough?

·      What should I be investing in?

·      Can anyone really live on $35K a year like Creator?

You're in luck! I plan to walk through all of these questions and more as I go through the Creator’s Path to Financial Independence series.  But what you should remember for now:

1. The creator’s life provides unimaginable financial potential,
2. Don’t fall in the consumer's trap of lifestyle inflation and debt, and
3. Invest what’s left over!

Post any other questions you’d like me to bake into the series in the comment section below.

Until next time!

**Update** The Creator's Path to Financial Independence: Part 2 'You're Earning Too Much!' is now available.