Hi, my name is Phil. I’m a video creator and online instructor. I’m also a personal finance nerd. Because of that, I want to create a series of videos that breaks down some of the most mystifying topics that plague our society. In a world where people’s finances are typically locked away and not-talked about, I believe opening up the gates of financial conversation will help everyone live a better and smarter life. In this first video, I want to explain the shockingly simple math behind early retirement – thanks to one of my biggest heroes, Mr Money Mustache. While the ability to retire may seem like a distant and unreachable goal for many, the premise comes down to one thing. You need to invest money so that it earns more money.
This could be investing in stocks or bonds, real estate, or any other of investment vehicles. As soon as your investments earn enough money for you to live on each year, you are able to retire. Let’s break it down further to know when you can retire. The most important concept is knowing your savings rate, basically how much you make minus your expenses. If you spend 100% of your income, you will never retire… because you will never be able to invest any money that earns money for retirement. If you spend 0% of your income, you can retire right now… because somehow you are living without needing to make any more money. Between 0% and 100% are a number of savings rates that correlate with the years it will take to retire. For this, let’s assume your annual investment return is 5% (which is conservatively low) and your withdrawal rate is 4%… meaning you spend 4% of your net worth each year.
For example, if you have a $1,000,000 net worth, and you live on $40,000. If your savings rate is 10%, you will be able to safely retire after years. Safely, meaning you will never run out of money. If your savings rate is 25%, you can retire in years. 50%, you can retire in years. And if you can somehow save 75% of your income, you can retire in years. Now getting to that savings rate might not be easy in our world of societal pressures, keeping up with the Joneses, and bad habits. But you can get closer by making smart decisions, avoiding debt, and living simply. The key take away is… Cutting your spending rate is way more powerful than increasing your income because no matter how much money you make, decreasing your spending will speed up the process. A note, The math behind early retirement works if you are working a minimum wage job or a 7-figure CEO salary. It’s all about the savings rate. So if you want to retire in 10 years, the math tells us that you need to save 66% of your income. Now there is a lot that I didn’t talk about – like how to invest, and how to cut expenses to get to a high savings rate.
Those will come in a future video. For now, get excited about the honest truth about retirement (and early retirement at that!)! Let me know what you think in the comments below? Is this exciting or bogus? Until next time… start being money smart. .
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In this video, I want to explain the 4% rule. This is also known as the Safe Withdrawal Rate – or basically the rate at which you can spend your money without ever running out of money. An easy way to calculate what this means for you – and how much money you’ll need to retire is by flipping it around and multiplying your yearly expenses by 25. For example, if you and your family spend $40,000 per year, you’ll need to have 1,000,000 invested to not run out of money.
There must be some limit to how long you can withdraw 4% and still have money left over, right? The study that explains the 4% rule is called the Trinity Study, and it looked at how much money you’d need to retire for every year between 1926 and 2009. The study found that if you invest 50% of your money in stocks and 50% of your money in bonds, withdrawing 4% of your money will be fine for 25 years, 100% of the time. Doing it for 30 years – you’ll still have money left over 96% of the time. only if you retired in a very unlucky year and never made any money after retirement including pensions or social security – the 4% rule didn’t work. So to make sure we’re all clear – the 4% rule isn’t 100% foolproof.
But those odds are pretty darn good – and even while I hope to retire from regular work longer than 30 years – i know I’ll continue to make money doing things i love which will make sure that the 4% rule does succeed. For those of you that want to be 100% sure your money will never run out (especially for those of you who plan to retire longer than 30 years), use the 3% rule and only withdraw 3% of your investments per year.
Let’s get back to the 4% rule and dive a little deeper. As many of you are probably asking, why is 4% the safe number and not 10% or 2%. Very simply, investing money will pay you dividends and increase in value at an average rate of 7% per year. On average inflation is about 3%, basically decreasing the actual value of the money you have. Combine those two numbers, and you’re a 4% – your net income will increase by 4% each year.
And if you spend that 4% without going over, you’ll end the year with the same amount that you’ve started… in perpetuity. Okay okay – i know a lot of you say this is crazy – what about the recession – you can’t predict stocks – and lots more thoughts. But let’s look at those numbers even deeper. Since 1900… over one hundred years ago, the average return per year has been 7% including reinvested dividends (meaning you reinvest the dividends – or the money the companies pay your for investing – into your investment). For inflation – since 1913 – over one hundred years ago, the average yearly inflation is 3.22% Even through the great depression, world wars, crazy years of inflation, more wars, and the great recession the average return rate has been 7% and inflation has been just over 3% What does this tell us? It tells us that investing is more about being patient and investing early rather than trying to time the market.
Now this doesn’t mean that it can’t change. Investing is a risk. That’s why you do it and make money from it. But world war iii could happen. another even greater depression could happen. and we have to be prepared for something like that. because if you retired with 1,000,000 in 2007, assuming you’d be able to spend 4% of your net worth per year, you were in for a surprise – which might mean going back to work for a few years and waiting out the recession.
Hopefully, if you did that… and left your investments in the stock and bond market, you would be in good shape. The key takeaway is that throughout the history of modern america – you’ll be fine to retire using the 4% rule. So calculate your yearly expenses… include some emergency padding… and start investing to get to that goal of 25 times your expenses.
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Is it possible in this day and age to become a millionaire? Or perhaps the better question is: why would you want to become a millionaire? I mean, in the media today, millionaires—and billionaires for that matter—are often not depicted in the best light. Characters like Scrooge McDuck or the always supremely evil C. Montgomery Burns come to mind here. And of course, right now in real life, we have the ever-present Donald Trump as one of the main poster boys for the super wealthy. So, I suppose, with that kind of media influence hovering over us our entire lives, it’s not surprising that most of us have a fairly negative view of the super wealthy, and many really do not want to become a part of it. Especially since the majority of us don’t personally know anyone who’s super rich, we don’t have anything to really balance the scales, and all we really have to draw upon is what we see in the media.
And that’s really unfortunate because there are a lot of really great, wealthy people out there. But most of them are not in the public eye, and even the ones that are, like Bill Gates, don’t get as much media attention as someone like Donald Trump does. And as a result, there are a lot of misconceptions about millionaires and the wealthy in general. Hey guys, Daniel here from Next Level Life, and it recently occurred to me that I’ve been neglecting a huge part of what it takes to have that next level life that we all dream of, because whatever your dream life is, you need to have the financial resources in place first to be able to live it.
So with that in mind, I’m going to be starting this new series on my channel, covering various topics in the field of personal finance. And as you can see by the title of my first video in the series, I wanted to talk about a simple plan that, if stuck to, will practically guarantee your future millionaire status, as well as take a moment to really define what a millionaire is and is not. Because, believe it or not, even for the average American, it is possible. No, you know that possible is too soft a claim because it’s more than possible. In fact, if you follow a few simple steps, it’s almost guaranteed. Don’t you believe me? Well, hopefully over the course of this video as well as the rest of my personal finance videos that will be coming out soon, I’ll be able to convince you. So without further ado, let’s get started. What is a millionaire? A millionaire is simply someone who has a million-dollar positive net worth. Meaning, after subtracting debts and other liabilities and expenses, they have a million dollars worth of stuff leftover between their cash, their house, and all their other assets.
That’s really all there is to it. It has nothing to do with how much money you make. It has nothing to do with what type of person you are or how well-known you may be; it simply means that your assets are valued at least 1 million dollars greater than your liabilities. But how can the average American get to that $100,000 in positive net worth in their lifetime? I mean, at $100,000,000, that’s 6 zeros. I’d imagine that most of us have never written a check with more than three zeros. Unless of course you bought a new car or house with cash, and if that’s the case, kudos to you, you may not even need this video because you’re already probably well on your way to that million-dollar net worth. Now, I said that if you follow a few simple steps, you will almost certainly reach the million-dollar mark.
Let’s find out how. Well, I did a few calculations and found out that over the course of the last 40 years, the S&P 500 has returned an average of % per year, not including dividends. Now, technically speaking, past results are no indicator of future returns, but until we see the future returns, this is the best we’ve got to go off of. So assuming that over the next 40 years the market does roughly the same as it has since 1978, you could invest $2 per month over the next 40 years and become a millionaire. Again, assuming no dividends Now, 261 dollars may seem like a lot, but when you break it down, it’s not even $10 a day, and there are lots of ways to save money. You can cut cable, or go down to a lower internet speed, or not eat out quite as often, or use coupons when you’re shopping for groceries, or you can do none of those things and instead find a way to make a little bit of extra income.
Maybe you start mowing lawns or shoveling driveways on the side; maybe you start selling old clothes that you don’t need anymore online; or if you’re young, you might be able to start teaching people how to use social media better. You’d honestly be amazed at how many people would pay you to do that. There are a ton of options out there; all you have to do is pick the one or maybe a few that work out the best for you and start your own journey on the path to becoming financially independent. Now there are a couple of things that I want to clear up before ending the video for those of you who are a little bit more analytical in nature. That percent is the geometric mean rate of return that the S&P 500 has had since 1978, according to Yahoo Finance. All I did to get it was go through each year and look at where the market was in September, because as of the recording of this video, September just ended.
Then I put them all into the Excel spreadsheet and calculated the return. And I think the reason why we hear so many different rates of return thrown around by financial gurus is because of the inflation effect. I’ve heard gurus say that you can expect to earn anywhere from 6 to 10% per year in the market. And depending on what time frame and type of average you use, any of those numbers could be true. For example, if you go back to 1978 and use an arithmetic average, the average return on the market would be about percent per year. Inflation is generally assumed to be about three to four percent, so if you adjust for inflation, your realized return would be somewhere in that 6–7% range. If you don’t adjust for inflation, of course, you’re looking at a nearly 10 percent return. So there you go—there’s a simple formula for retiring with the amount of wealth that most of us would consider to be rich.
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