Tag: next level life
10 Levels of Financial Independence And Early Retirement | How to Retire Early
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
Long-term financial goals can sometimes seem
so big that they feel almost unattainable especially when we’re just getting started
on our road to financial independence. I and many others like me in the financially
independent, retired early community have found it helpful to break down the goal of
becoming financially independent into smaller and more manageable levels of financial independence. Not only because it makes it easier for us
to track our progress, which in turns helps us to stay motivated throughout the process,
but also because it helps us get over that initial hurdle of starting to chip away at
this mountain of a task. In today’s video, I’m going to take you
through what I consider to be the 10 levels of financial independence as well as give
an example on how to go from the first level to the top level in your lifetime. Hey everyone Daniel here and welcome to Next
Level Life a channel where you can learn about Investing, debt, retirement, and many other
general financial education videos because the school's aren't going to do it for us.
So if any of those topics sound interesting
to you or if you want to learn how to better handle your money and have more financial
freedom be sure to hit that subscribe button and the bell next to my name to be notified
every time I upload a video. And if you want to further support the growth
of this channel you can check out some of the links I’ve left down in the description
below which includes a 30-day free trial of Audible and 2 free audiobooks of your choice
as well as a list of some books on money I’d recommend checking out, or you can share this
video with a friend, and leave a comment below letting me know what topics you’d like me
to cover in future videos.
Now obviously these ideas of the levels of
financial independence are not solely my own nor are they very new as there are many articles
and blog posts that have covered this topic already and have done so for many years. So consider this more of a summary of many
of the ideas expressed in those articles and if you want to learn more about the topic
feel free to check out some of the articles for yourself. I’ve left some links in the description. With that out of the way, let’s get started. Okay so real quick the 10 levels of financial
Independence are Level 0 Financial dependence, level 1 Financial solvency, level 2 Financial
stability, level 3 debt Freedom, level four coasting Financial Independence (also sometimes
known as freedom from employer), level 5 Financial Security, level six Financial flexibility,
level 7 Financial independence, level eight Financial Freedom, and finally level 9 Financial
abundance. The levels are usually defined as something
like the following: Level 0 – Financial dependency is when your
debt payments and other living expenses are greater than your own income.
This means that you are in one way or another
dependent on someone or something else to help you pay for your bills or if you happen
to be a kid and don't actually have any bills you need someone else, usually your parents,
to pay to put food on the table and keep the lights on and have a roof over your head. This is the level that all of us start out
on and it is referred to as level 0 because as a financial dependent you obviously have
no Financial Independence. Level 1 – Financial solvency is when you are
current on all your debt payments and you can meet your financial commitments and your
other living expenses without any outside help. Level 2 – Financial stability is usually defined
as when you have built some sort of emergency fund in addition to being financially solvent. Level 3 – Is again debt freedom and it's defined
differently depending on who you ask. For some, it is being completely debt-free,
mortgage and everything.
For others, it's being just free of the high-interest
debts like credit cards but you still might have a mortgage or other debts like student
loans. And for some others, it is paying off all
of your debts except for the mortgage but your credit cards and student loans or car
loans all that stuff is all paid off. Level 4 – Coasting Financial Independence
also sometimes known as freedom from the employer, Barista Financial Independence, or Agency
in blogs and other mediums. I personally like the idea of it being coasting
Financial Independence so that's what I'm going to be using in this video but know that
some people refer to it by one of those other titles but the idea is the same. You have reached the level of coasting Financial
Independence when you could, if you wanted to, step down from a job that may be higher-paying
but may also be either less satisfying or more stressful or both into a new job that
is lower paying but more enjoyable or less stressful or both.
This is because in the early years of your
career or just thought most recent years you have managed to save a very decent sum of
money that would be able to provide for the later years of your retirement after it has
grown even if you don't put much more in. Therefore all you need to do is make enough
money to get you to age 60 or 65 or 70 or whatever your numbers work out to be when
that amount of money you've already invested will be able to fund your lifestyle because
it's been given enough time to grow. So in a sense, you've worked really really
hard and been very frugal in the first few years so that you can coast into your retirement. I have gone into more detail on the various
types of financial Independence in a previous video which I'll leave Linked In the description
if you're interested in learning more.
Level 5 – Financial Security is effectively
when your cash flow from wealth such as you are investments has grown to large enough
that it can provide for your annual basic survival expenses. Now I say survival expenses because I do differentiate
that from living expenses survival expenses are just the basic things you need to survive
Food, Water, Shelter, some form of transportation, clothing and probably insurance. This does not include things like Netflix
subscriptions or cable bills or things like that it is purely survival expenses. So this may not be exactly the ideal spot
to retire and I certainly wouldn't want to retire at this point but it is an important
level to keep in mind because it does give you… well security. If you were to get fired today and you were
on level 5 you would be okay you could survive until you found another job. This is essentially the first level that really
gives you I guess that piece of mind even if the lifestyle should you have chosen to
live it may not be the most lavish.
Level 6 – Financial flexibility is similar
to Financial Security just one step up. It is when you have the ability to live off
of your current cash flow from your wealth assuming that you have a flexible spending
plan that adjusts for up and downs in the market. So if the markets up 20% one year you're able
to spend a little bit more but if the market is down 20% the next year then you don't spend
quite as much. I’ve seen it defined many different ways
so it could vary depending on who you ask, but the one that I personally like the most
is that it is roughly half of your full financial independence goal, or roughly about 12.5x
your current annual expenses if you follow the 4% rule to get an idea of how much money
you need to retire like I’ve explained in previous videos.
So it isn't quite Financial Independence yet
but it's close. Level 7 – Is financial Independence and it's
usually based on the 4% rule which I have covered in a previous video. You can follow the 4% rule when you have saved
roughly 25x your annual expenses. The vast majority of the time this will be
enough money to allow you to maintain your current lifestyle in retirement and as a result,
you can be considered financially independent. And some articles end it right there but I
think there are a couple of levels that are a bit higher than that that are worth considering
even if some of us may decide to not ever try to achieve them because being at level
7 allows them to do what they wanted all along. So let's talk about those other levels. Level 8 – Is Financial Freedom which I've
often seen defined as the cash flow from your Investments is greater than financial Independence
and a few more life goals.
Life goals, of course, will differ for everybody
but this is could be something like taking a trip or two overseas or moving to a new
place you've always wanted to live but haven't had quite enough money to live there up till
now or whatever the case may be for you like I said it's different for everybody. Level 9 – Is financial abundance and this
is quite simply just that the cash flow from your Investments is more than you will ever
need.
You could spend it if you really wanted to
but it would actually take some effort. And the stuff from level 8 doesn't really
cut into it much at all. So you could up those goals even more and
still have more cash flow left over at the end of the year. This also probably has a slightly different
definition for each person depending on who you ask, but I like to think of it as roughly
3x your financial freedom number because this would allow you to experience a horrible bear
market where your investments go down by 50% and still has 1.5x the amount that you would
need to maintain the lifestyle you lead when you reach level 8.
To me, that means that it is likely more than
you will ever need, but again that one is strictly my own opinion on the matter. So those are the 10 levels of financial Independence,
now let's walk through a hypothetical example of how someone could go from Level 0 to being
financially independent in a single lifetime. John and Jane are recently married couple
each making $20 an hour at age 23 or $83,200 a year between them assuming no overtime. They manage this because they are not only
good hard-working people but got great grades in school and we're selective about the job
that they decided to pursue. Obviously just like everyone else they would
have started off as Financial dependents and as they were going through college they would
have been building up student loans that they would not have had the money to pay off (assuming
of course that they didn't earn enough money while in school to keep up with the rising
debt).
In all they have credit card debt, two car
payments and the student loans which have balances of $5,000, $35,000, and $60,000 respectively,
but since they got their jobs they are no longer financially dependent and their incomes
have allowed them to become current on all their debt payments without the help of others. In addition to the regular monthly debt payments,
their annual expenses are $48,000 a year. So they are currently in level one Financial
solvency and trying to figure out a way to move to level 2 Financial stability. In order to do that they need to figure out
a way to build up an emergency fund.
Now if they're following the 10 levels system
to a T then they would look to build a 3 to 6-month emergency fund of their survival expenses. However, this is not the only way to approach
it say if you were to follow Dave Ramsey 7 baby steps you would start off with just a
$1,000 starter emergency fund and then get right onto attacking your debts. And other Financial systems and plans may
have you approached it an entirely different way.
Either way is perfectly fine because the 10
levels system is not meant to be a financial formula per say it's more there to give us
some sort of guidepost so that we can better track our progress towards achieving Financial
Independence. But for the purposes of this video, I am going
to assume that they follow the 10 levels in order so we are going to be building up a
full emergency fund. In order to find how much of an emergency
fund they will need we will need to know how much money they need to survive not necessarily
on their current level of expenses while they have jobs but purely on Survival expenses
which are basically your four walls of your financial house or in other words food shelter
including utilities Basic clothing and some form of transportation as well as the insurances
that are related to that assuming there are any.
In this case, I'm going to assume that their
survival expenses are right around $3,000 a month. Which means that in order to get a 3-month
emergency fund they would need $9,000 in order to get a six-month emergency fund they would
need to save $18,000. Both John and Jane feel that their jobs are
pretty darn secure and the market is doing fairly well so it's not likely at least in
the near-term that they would get laid off because the company has to downsize so they
decide together that they are comfortable with having just a 3-month emergency fund
of $9,000. So with $83,200 a year in income, $48,000
a year and expenses, plus minimum monthly payments of $100 on the credit card which
is 2% of the balance, $550.78 on the car loans, and $621.83 on the student loans they will
have approximately $1,660.72 a month left over to start building their emergency fund.
However, both John and Jane have been looking
into their finances and researching a lot lately and they become fired up at the possibility
of becoming financially independent while they're still young. So they want to see if there's a way that
they can speed this whole process up. And as it turns out thankfully there are many. After taking a look at the options they decide
that they're going to work as much overtime as they possibly can (for the sake of Simplicity
I'm going to assume that they manage to work on average 5 hours per week of overtime which
will increase their monthly income by about $1,300 a month, meaning that instead of $1,660
a month they will have $2,960 a month left over) and they're going to sell both of their
cars and buy some nice used cars with cash to help knock down some of that initial debt. After putting out a couple of ads online they
managed to find buyers for each of their cars that is willing to give them $15,000.
So they take that $30,000 and use $5,000 of
it to pay off the credit card balance and another $10,000 to buy a couple of used cars
from someone that they know takes good care of their Vehicles whether that be a family
friend or just a mechanic that they Trust. The remaining $15,000 is thrown at their car
loans. This means that the credit card loan is fully
paid off and therefore the hundred-dollar minimum payment is no longer needed. So John and Jane start throwing $3,060 per
month into their emergency fund and get it fully funded in 3 months with a little bit
left over at the end of the third month to throw out their car loan. Over the course of those first three months,
they managed to bring the car loans balances down to $18,423 thanks in large part to the
$15,000 that they threw at it in the first month after selling the cars and also making
the minimum payments in the first three months. Now that their emergency fund is fully funded
however they're able to throw that $3,060 a month in addition to the $550 a month minimum
payment at the car loan and get it paid off in 6 months flat.
So a mere nine months into their Journey John
and Jane not only have a fully funded emergency fund but they also have paid off both of their
car loans. Now there are just the student loans to tackle. And thanks to the fact that they've been making
minimum payments on them for 9 months and the fact that they had a little over $3,000
at the end of the ninth month after paying off their car loans their student loans now
have a balance of $53,263. John and Jane follow the same pattern that
they did with the car loans throwing the $3,600+ which is what they now have left over at the
end of every month because they no longer had a $550 car payment to make and they managed
to get their student loans paid off in full in 13 months. So John and Jane have managed to become debt
free and have a fully funded emergency fund in 22 months.
They have now reached level three and because
of that they now have over $4,200 a month left over to start investing. This brings us to level four coasting Financial
Independence. Let's assume that John and Jane want to retire
by the age of 65. That means that whatever they put in now needs
to be enough to grow to a point where it can support their lifestyle in retirement by the
time they're 65. If we assume a rate of return on an average
in the market of about 10% before inflation and an inflation rate of about 3% per year
on average then we can get a rough estimate of how much John and Jane need to put away
in order to achieve a state of coasting Financial Independence. In this case, since they're 24 about to be
25 they will have somewhere in the neighborhood of 39 or 40 years to let the money grow before
needing to take any of it out. If their expenses were $48,000 a year at age
23 then 42 years later if we assume a 3% rate of inflation they would need a tad bit over
$166,000 each year to live on.
Again assuming we follow the 4% rule to figure
out how much they need once they fully retire to be financially independent that means that
they would have to have at least $4.15 million invested in the market by the time they turn
65. In their case, they would need about $110,000
saved up give or take in order to achieve coasting Financial Independence and because
they're able to save about $4,233 a month now that they’re debt free, they’re able
to hit that goal in 2 years flat.
Meaning that in theory, they would be able
to step down from their jobs to a more rewarding less stressful but probably lower-paying job
just 3 years and 10 months into their financial Journey. That is incredible! But like I said coasting Financial Independence
wasn't their end goal. They wanted to be fully Financial Independent
so they keep working and investing for now. The next level is level 5 Financial Security
which is achieved when your cash flow from your Investments is greater than your annual
survival expenses which remember is $3,000 a month or $36,000 a year in John and James
case. Because they are debt-free, are making good
money at their jobs, and being intentional with their finances they Achieve Financial
Security in a little over 4 years with over $367,000 in their portfolio.
It is been a mere 87 months or 7 years and
3 months since they began their financial Journey. John and Jane are 30 years old and they are
able to get by on their Investments alone. In theory, they could retire now, it wouldn't
be the most glamorous retirement and it wasn't their goal but it is an option they have. They don't have to worry about losing their
jobs anymore because even if both of them lost their jobs today they would be able to
make it long enough to either find a new job or some other source of income. This is really the first level where you start
to get that piece of mind when it comes to money at least in my opinion. Next is financial flexibility which as I mentioned
earlier in the video has many definitions depending on who you ask but for the purposes
of this video, I'm assuming that it is roughly 12.5x your current annual expenses which for
John and Jane would be roughly $600,000 or about $855,000 if you account for inflation. This means that they would Achieve Financial
flexibility 9 years and 8 months into their Journey not accounting for inflation or about
11 years and 9 months if we do account for inflation.
John and Jane continue investing through all
the highs and lows of the markets until they reach Financial Independence exactly 14 years
into their financial Journey assuming we don't account for inflation or 18 years and 3 months
if we do. So you might be wondering why did I split
up the accounting for inflation time frames and the not accounting for inflation time
frames should we always be accounting for inflation? Well technically yes but the reason I split
them up is because in my experience taking this journey myself as well as seeing others
take it, this journey changes how you view a lot of things and more often than not those
changes lead to you valuing things such as freedom of mobility and location and freedom
of time to be able to spend with the people you love more and valuing more material things
that cost possibly a lot of money less and less. That's not to say that everybody becomes minimalist
going through this journey, I'm not saying that at all but I have seen a lot of people
who have gone through this journey become closer to minimalist than they were when they
started the journey as they find out more and more things that they used to buy just
don’t provide enough value or happiness for them to be worth the purchase.
They find better uses for their money and
time and as a result, they generally tend to spend less. Which means that even though inflation is
technically increasing your expenses by making every dollar less and less valuable over time,
if you're also decreasing your expenses because what you value is changing it may even out
or in some cases, you may even see your regular expenses going down year-over-year as you
continue through this journey. So that's why I split them up. And, before I go, I do want to mention that
based on what I've seen on various articles and forums some people really like to have
even more goals to chase as they go through this journey than what I've laid out today
in this video so if that's something that would help you feel free to break down these
levels even further then I have today this is obviously just the list that I used and
what worked for me, but you could take it even further.
For example, Debt Freedom could be broken
down into three separate stages: One where you are free from all high-interest debt,
a second where you are free from all debts except for the house (if you have one), and
a third where you are totally debt-free. You could tackle the coasting Financial Independence
level in a similar way breaking it down into two stages: One where are you have invested
enough to survive in retirement and a second where you have invested enough in order to
maintain your current lifestyle, adjusting for inflation of course, in retirement.
And the financial independence level could
also be broken down into three stages: Stage one would be where you are at a survivable
level of financial Independence, stage 2 would be where you have achieved leanfire status,
and stage 3 would be where you have achieved full Financial Independence on your current
lifestyle assuming that it is above the leanfire level. So what do you guys think of this 10 levels
system of tracking our progress to financial Independence? Do any of you use a similar system to track
your progress? If so, what is it and what level, step, or
stage are you guys currently on? Let me know in the comments section below. But that'll do it for me today once again
if you enjoyed this video be sure to subscribe and hit that Bell next to my name so that
you'll be notified of all my future uploads.
I generally upload every single Monday, and
if you have a friend that would be interested in this kind of content be sure to share it
with them and let's really get this information out there and start our own Financial revolution..
The #1 Wealth KILLER
Jason 0 Comments Retire Wealthy
Albert Einstein once referred to compound interest as the 8th wonder of the world. Saying he who understands it earns it; he who doesn’t pays it. And he couldn’t have been more right. Today we’re going to be looking at the miracle that is compound interest and how can protect my retirement as it relates to the #1 killer of your wealth. Let’s get started. So the #1 wealth killer is debt. Yeah, I know, big shocker. But it’s really true and today we’re going to look at why that is.
The truth is, having too much debt can put a limit on your greatest wealth-building tool – your income. While it may be tempting to invest rather than pay off your debt, compound interest is a force to be reckoned with. In fact, I recently dedicated an entire video to its power. Financial advisors often use the example of Jane, who invests $100 per month ($1,200 per year) from the age of 18 to 25 and earns an average of 10% per year on her investments. By the time she stops investing at age 25, her nest egg will be worth just over $15,000.
However, before you start investing, it’s important to consider your debt load. Here are some reasons why paying off your debt first may be the smarter choice:
High-interest rates: Many forms of debt, such as credit card debt or personal loans, carry high-interest rates that can negate any potential investment gains.
Risk: Investing always carries some degree of risk, and if you have high levels of debt, taking on additional risk may not be advisable.
Stress: Debt can be a significant source of stress and anxiety, which can have negative impacts on your overall financial well-being.
Freedom: Paying off debt can give you a sense of freedom and control over your financial situation, allowing you to make better long-term decisions.
That being said, paying off debt doesn’t mean you can’t invest at all. Here are some steps you can take to balance debt repayment and investing:
Create a budget: Determine how much money you can allocate towards debt repayment and investing each month.
Focus on high-interest debt: Prioritize paying off high-interest debt first, as this will save you the most money in the long run.
Consider employer-matched retirement accounts: If your employer offers a retirement plan with a matching contribution, take advantage of it. This is essentially free money that can help you save for the future.
Seek professional advice: A financial advisor can help you create a personalized plan that takes your unique financial situation into account.
In conclusion, while compound interest is a powerful tool for building wealth, it’s important to consider your debt load before investing. Paying off high-interest debt should be a priority, but that doesn’t mean you can’t invest at all. By creating a budget, focusing on high-interest debt, taking advantage of employer-matched retirement accounts, and seeking professional advice, you can balance debt repayment and investing to achieve your financial goals.
Over the course of the next 45 years, those investments will continue to grow. Assuming that it continues to grow at an average annualized rate of 10% per year she will end up with $1.1 million in her portfolio at age 70. That’s all achieved with eight years of investing $100 a month. Jane becomes a millionaire by investing $9,600 of her own money. On the other hand, we have John. John doesn’t start investing at age 18. Instead, he starts at the age of 26 (just after Jane had finished all of her investing). He also invests $100 a month. However, unlike Jane, he does it from the age of 26 all the way until the age of 70. John invests $54,000 of his own money over the course of those years and ends up with a nest egg of just under $950,000. So John ends up with approximately $150,000 less than Jane. This is in spite of the fact that he invested six times more of his own money than she did.
It’s no secret that excessive debt can put a damper on your ability to build wealth using your most powerful tool – your income. While the concept of compound interest is widely known to be an effective way to grow your money over time, paying off debt may seem like a counterproductive move. However, it’s important to remember that not all investments are created equal, especially when you’re dealing with debt payments.
Let’s take a look at an example: Jane invests $100 a month for 7 years starting at 18 and ends up with a net worth of $1.1 million at the age of 70. Now, let’s say John starts investing $100 a month at the same age and earns an average of 10% per year, just like Jane. Even if John continues to invest until he’s 100 years old, Jane would still have more money than him, and her lead would only increase with time. In fact, at the age of 100, Jane would have $19.2 million to her name, while John would have $16.7 million. This just goes to show the power of compound interest, as famously called by Albert Einstein as the 8th Wonder of the world.
However, when it comes to investing, it’s important to consider the context of one’s financial situation. Comparing someone who is debt-free to someone who is not will not provide an accurate comparison. While Jane invested $100 a month for 7 years, John was dealing with debt payments and didn’t invest anything for those first 8 years. But what if John managed to free up an extra $200 a year, or less than $17 a month, by paying off his debts? In that case, he would come out ahead of Jane by the time they’re both 70. And if he freed up more money than that, he would pass Jane even earlier.
So, what’s the takeaway? While compound interest is undoubtedly a powerful tool, it’s important to also consider the impact of debt on one’s ability to invest. Paying off debt and freeing up funds for investment can ultimately lead to greater financial success in the long run.
And given the state of the average American debt situation, $17 a month in payments is a remarkably conservative estimate. According to articles in business insider,
CNBC, and Forbes the average American debt situation looks like this: About $9,000 in credit card debt which is
often split between several cards. $30,000 in student loan debt. And assuming a used vehicle was bought a little
over $21,000 on a car loan. That’s around $60,000 in total debt. If we assume 18% interest on the credit cards
and 4.5% interest on the other loans and terms of 5 and 10 years on the car loan and student
loan respectively, the minimum payments could be roughly $900 a month. Freeing up that much cashflow could make a
tremendous difference in the previous example. Let’s look back at John’s situation from before
and assume that his household’s debt situation was that of the average American. John uses his $100 a month of excess cash
flow to pay off these debts.
Based on the numbers it would take him roughly
six years to become debt-free. This is assuming he did not work any extra
hours or sell anything to get out of debt faster. Once he was debt-free he would have almost
$1,000 a month left over to invest. If he starts the process of becoming debt-free
at the age of 18 when Jane was starting to invest he would have become debt-free by his
24th birthday. If he then turned around and started investing
the full $1,000 a month he would actually be further along in his investments by his
25th birthday then Jane was. Granted this is largely because he has invested
more money than Jane has at this point. Jane by her 25th birthday had only invested
$8,400. That’s quite a bit less than John’s $12,000
but think of the potential payoff of this down the road if John keepS investing that
money.
He’ll also likely be able to lead a much
better lifestyle than Jane in the present due to his lower monthly expenses. Jane may eventually equal him in that regard
if she gets her debts paid off, but for those first several years after John is debt-free,
it is worth noting. Remember, compound interest is an incredibly
powerful mathematical force. But it can work just as hard against you as
it can for you. So it’s important to make sure that compound
interest is your ally in your finances, not your enemy. So with that being said how do we avoid this
killer of wealth? First, if you’re lucky enough to not have
any debt right now research some ways to ensure that you keep it that way.
If you’re planning to go to college look into
ESA or 529 plans. They are ways to start saving for college
while lowering your tax burden (which is always a nice perk). Also, look into scholarship opportunities
or PSEO. Don’t be afraid to have a summer job and work
during the school year part-time. For the record, this can also be a good option
in high school to give yourself a head start financially so long as it doesn’t take away
from your studies too much. Make sure that you always have an emergency
fund. It should contain three to six months worth
of expenses so that you don’t have to take on debt for those moments when life happens. Make sure you have insurance for those catastrophes
that you wouldn’t be able to cover with your savings. Catastrophic health emergencies are a good
candidate for this.
If you’re already in debt, learn about how
people have paid off their debts. Then choose the strategy that is most likely
to get you (and keep you) completely out of debt. Three of the most popular strategies are the
debt snowball, debt avalanche, and debt tsunami. I have done videos on all three of those and
they will be linked in the description. The debt snowball is the one made famous by
financial personalities such as Dave Ramsey. It has you order your debts from smallest
to largest balance and pay them off in that order regardless of the interest rates on
those debts. The plus side is the momentum you can build
up for yourself by quickly wiping out those bills. The downside is it isn’t the most mathematically
efficient way to get out of debt, all else being equal.
The debt avalanche is the more mathematically
efficient option if you can stick to it. It has you order your debts from highest to
lowest interest rate and pay them off in that order. This is regardless of the size of the loan
itself. The upside is the fact that you’ll be paying
less in interest. The downside is in some situations it may
take quite a while to get rid of that first bill. For those who are more motivated by seeing
the balances of the debts themselves going down this may not be much of an issue.
For those that are more motivated by the lowering
of bills, this could be an issue in some situations. The debt tsunami has you order your debts
from the most emotionally stressful to the least emotionally stressful and pay them off
in that order. In some cases, this could mean paying off
the largest balance that also has the lowest interest rate first. However in my experience that is not commonly
how it goes. Most of the people that I’ve seen use this
strategy tend to use it because there are personal loans between family or friends that
are causing a lot of stress in the relationship. The person with the debt uses the tsunami
to get rid of that loan first and then often switches to a different strategy such as the
snowball or avalanche. Which is another viable option for many people. There’s nothing stopping you from starting
with one strategy that will help get you going and then switching to another that will work
for you longer-term.
I know a lot of people who have started with
the snowball to get themselves some momentum and then switched to the avalanche once they
were on a roll so that they could save on interest. Another thing I would recommend looking into
is the power of the debt snowflake. If you haven’t heard, the debt snowflake is
a strategy where you find ways to free up money (or just happened to find the money)
that you can put towards your debt payoff strategy. The nice thing about it is it works well with
any of the other three strategies I mentioned. While by itself it isn’t game-changing it
does help your primary strategy do its job a little better. And as we know every little bit helps. If you need more motivation make sure to check
out Dave Ramsey’s YouTube channel and their debt-free screams playlist.
It’s filled with a lot of amazing stories
of people paying off loads of debt on various levels of income and getting to see their
relief when they are finally debt-free is very inspiring. You might also find their Turning Points playlist
interesting. It is essentially interviews of people who
have become debt-free talking about what made them decide to go through that process and
achieve that lifestyle. I’ll leave a link to both playlists in the
description as well..
The simplest retirement plan ever.
Jason 0 Comments Career after Retirement Retire Wealthy
there are a lot of complex strategies out there when it comes to withdrawing your money in retirement we've already gone over some of them such as the Guyton clinger rule but not all strategies have to be that complicated to work well sometimes the simplest strategy is the most brilliant of all and today that's what we're gonna talk about we're gonna be talking about two of the simplest retirement spending strategies out there we're gonna discuss their pros and cons as well as who should be using them let's get started but before we get going be sure to LIKE this video if you haven't already as it really does help out the channel a lot and subscribe with notifications on for more money related videos like this one every single week so the strategies that we're gonna be covering today are very similar to one another in that they are both known as fixed withdrawal strategies they are the fixed dollar withdrawal strategy and the fixed percentage withdrawal strategy let's start with the simpler of the two the fixed dollar withdrawal strategy the fixed dollar withdrawal strategy is exactly what it sounds like you begin by withdrawing a certain dollar amount from your nest egg every single month and keep that amount constant throughout your entire retirement it literally doesn't get any simpler than that say if John were living on this strategy in retirement he has a 1 million dollar nest egg and wants to be able to live on $40,000 a year he withdraws $40,000 in that first year of retirement does the same thing in the second and so on and so forth in other words there are no adjustments for inflation using this method to analyze this strategy let's look at the four factors of retirement which for those who are new to this channel our income risk stability and buying power income measures how much money is coming in the door each month as well as when that money is coming in its measured this way because not all retirement spending strategies are systematic and linear with their income growth and none of us know how long we're gonna be in retirement so we tend to put more of a priority in having abnormally high income years in the earliest portion of our retirements since we don't know if we'll ever get to the later portions risk is the likelihood of outliving your money stability is graded by how often you experienced anything that would be considered an undesirable change in your income from one year to another this could come in the form of a freeze on the growth of your income or just a decline in your income from near to the next and buying power is defined like it always is it's a measure of how much your money can actually get you at any given time and is largely tied to inflation the fixed dollar strategy is generally considered to be a little stronger on income and risk in comparison to other popular strategies like the 4% rule but it does suffer in terms of stability and buying power the reason for this is simple as long as your initial withdrawals aren't too high you're relatively unlikely to outlive your money using this strategy and you may actually be able to live at a higher standard of living at least initially than you would have in other similar strategies like the 4% rule in fact going all the way back to 1950 if John had had that one million dollar nest egg invested in something like the S&P 500 he would not actually outlive his money during any 20 30 40 or 50 year retirement as long as he would true no more than fifty four thousand dollars a year or forty five hundred a month so even things like the housing crisis in dot-com crash didn't cause him to run out of money so this does grant John a higher standard of living initially than the 4% rule would have because of course with a 1 million dollar nest egg the 4% rule would only allow him to draw $40,000 a year to live on though eventually like I said the inflation effect would catch up with him using the fixed dollar approach and that's where this strategy does tend to fall short it's not meant for longer retirements because while John may be able to handle living on $54,000 a year particularly if he's retiring debt free with a paid off home it becomes increasingly difficult to do that as the years go on due to the inflation effect historically speaking inflation has averaged somewhere between 2 and 3% per year in the United States if we assume that our personal average inflation rate in retirement is nearer the top of that scale well at 3 percent per year then John's $54,000 a year income will get him the equivalent of what $40,000 would buy him today in just 10 years time in 20 years his money would only be able to buy him about what twenty nine thousand nine hundred dollars would buy him today and his money would be worth the equivalent of twenty two thousand two hundred and fifty dollars sixteen thousand five hundred and fifty dollars and twelve thousand three dollars a year in 30 40 and 50 years respectively just because of the effect of inflation so just for a minute let's imagine that John had decided to follow the financially independent retire early movement but instead of using the 4% rule which helps to protect your buying power over longer term retirements like those in the fire community are aiming for John decides to use the fixed dollar withdrawal method assuming everything else stayed the same John would retire at the age of 30 with a $54,000 a year income and a 1 million dollar nest egg again at the age of 30 that would be perfectly fine for him however the average life expectancy for people living in the u.s.
Is about 79 years old as of 2019 and it's possible that that number will continue to grow as technology and medicine continues to advance so assuming he doesn't die young it isn't out of the question that he would have a near 50-year retirement and be living on the equivalent of about $1,000 a month when he's aging and his medical costs are at their highest as you can imagine that wouldn't be an ideal situation for John and that's why this strategy generally isn't the best idea for longer term retirements but for the right person in terms of the four factors of retirement the fixed dollar strategy is above average and income and risk but below average instability and buying power in comparison to the 4% rule the fixed percentage method works very similarly to the fixed dollar method except that you're withdrawing a certain percentage of your nest egg every year as opposed to a certain dollar value this strategy also doesn't adjust for inflation but it does at least adjust with the value of your portfolio and depending on what you're invested in and what initial percentages you choose this method may work out all right say John just wanted to withdraw a 4% of his investments each year in retirement since the value of his investments were $1,000,000 when he retired he would withdraw $40,000 in his first year that would leave him with nine hundred and sixty thousand dollars left over if his investments went up by 10 percent that year the value of his portfolio would be somewhere in the neighborhood of a million and fifty six thousand dollars at the start of his second year of retirement since he's withdrawing four percent of that he would live on forty two thousand two hundred and forty dollars in that second year assuming inflation was three percent during that first year of his retirement his buying power would have actually gone up if he had merely adjusted his withdrawals for inflation like he would have if he were using the actual 4% rule he would have withdrawn 40 1200 dollars in his second year or about a thousand and $40 less than he did using the fixed percentage withdrawal method in this scenario the downside that I'm sure a lot of you already see is that the reverse can also happen say that the following year john's investments fell by 20% bringing the value of his nest egg down to about eight hundred and eleven thousand dollars and forcing him to withdraw thirty two thousand four hundred and forty dollars in the third year of his retirement that would be significantly less than the forty two thousand four hundred dollars that John would have withdrew in that third year using the actual four percent rule so as you can see depending on the situation stability is something that this strategy could have a very low score in given that the value of a nest egg especially if it's invested in something like stocks can grow or shrink by 20 30 or even 40 percent from one year to the next the bright side of course is that you have a very low risk of running out of money theoretically it's actually zero if you're able to follow this strategy to a tee and I specifically say theoretically because like many things it's only gonna be true up to a certain point if we take it to a logical extreme we can break this down say if John had $10,000 in his nest egg and he wanted to live on fifty percent of that nest egg for the next five years in theory he'd be fine and he'd never run out of money because he'd always be withdrawing fifty percent of whatever that nest egg is but how many of us are gonna be able to live on five thousand dollars a year that would be what he'd be withdrawing that first year and of course it would be even less the second year if his investments stayed flat his second years withdrawals would be half of five thousand dollars or twenty five hundred dollars and I don't know many people that are living on two hundred dollars a month but the point is if you're willing to take the hit to the stability of your income in retirement you can usually safely squeeze out a little more than four percent of your nest egg each year in a typical retirement using this strategy you just have to be prepared to see the average raw dollar income that you receive shrink as you go further into your retirement to illustrate this let's say that John withdrew 10% of his nest egg each year assuming he had that one million-dollar nest egg he would start out with a six-figure income however if he ended up living longer than he planned on he could eventually find himself living on what would only be generously described as a shoestring budget for example in the simulations I ran covering the various retirement lengths starting from 1950 onward assuming John had invested in the S&P 500 he would have had a median monthly income of about $6,500 a month in 20 and 30 year retirements which when adjusting for inflation would be about $3,600 a month in 20 years scenarios and twenty seven hundred dollars a month in thirty-year scenarios but that number did shrink a lot as the retirements got longer for example in 50 year retirements his average median monthly income was about forty four hundred dollars which again doesn't sound bad but when we look at the final few years worth of his monthly withdrawals we find that it's actually about $2,300 a month on average which is considerably less than the six-figure income he started with and of course that $2,300 a month was what he was actually withdrawing almost 50 years from now once we adjust for inflation over that time it may not even buy John what $1,000 a month would buy him today so similar to the fixed dollar withdrawals your buying power could be taking a significant hit if the initial percentages you set in this strategy are too high in summation the fixed percentage method scores reasonably well though not elite when it comes to income particularly when used in early retirements it does great in terms of risk again assuming you're not too aggressive with your initial percentages but is questionable with stability and below average in terms of buying power so in the end who should use these strategies now I'll admit I am personally biased here I believe there's very few people who should realistically be using these strategies as their primary method it's mainly limited to those with very short expected retirements so that their buying power doesn't become too damaged over time and even then ideally only by those who are also approaching that same retirement with little to no debt because especially with the fixed percentage method you'll often need to be pretty flexible with your spending from your year but for those who aren't retiring early and will have no more than nine or ten years that they expect to be retired they have little debt to speak of and want something very simple to follow when figuring out how much of their money they should withdraw each year one of these strategies could work out well it gives you some advantages in terms of income without significant increases in risk but what are your thoughts do you agree with my assessment of the strategy or do you think that I'm missing something do you think another strategy would work better for people in that situation let me know in the comments section below but that'll do it for me today once again if you haven't already be sure to LIKE the video as it really helps the channel a lot and if you want to learn more about various retirement planning strategies be sure to check the links on the screen for my videos on how to safely spend money in retirement as well as protect your nest egg and as always thanks for watching
Read MoreHow to Become Rich | Retire on $10 a day
Jason 0 Comments Retire Wealthy
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.
As found on Youtube
Read MoreCan YOU Afford to Retire? | 4% Rule Explained | Safe Withdrawal Rate
Jason 0 Comments Retire Wealthy
How much money do you think you would need to be able to retire? It’s a question that a lot of people have asked their financial advisers and it’s one that seems to have a different answer for just about every time it’s asked. And the reason for that is simple the amount of money that you need to be able to retire depends entirely on how much money you think you can earn in retirement through interest and dividends and maybe even a part-time job if that’s your thing, and perhaps even more importantly how much money you’re actually going to need to survive in retirement. And that number seems to change each and every time you ask as well because projections of things like medical expenses change as time goes on. And I’m sure those of you who are nearing retirement watching this video know medical expenses just seem to be going through the roof, particularly for retirees. But that doesn’t really help us it doesn’t give us a goal to strive for as we’re going through our working careers. We may not be able to come up with an exact number that we’ll need but can we come up with something that’s at least going to be close? Well today I’m going to talk about something called the 4% rule and how it gives us that goal to shoot for.
I’m also going to be talking about some other factors to keep in mind when you’re using this rule of thumb as well as some situations where you’re going to want to avoid the 4% rule in entirely. Let’s get started. So what is the 4% rule? It’s a rule of thumb that’s used to determine the amount of funds that you will withdraw from a retirement account each year. It’s also sometimes called the safe withdrawal rate because the money you take out usually consists mostly of interest and dividends, and thus your principal either stays the same or goes down a little bit but not too much. In fact in 1994 a financial advisor named William Bengan did an exhaustive study of historical returns in the market focusing heavily on the severe Market crashes of the great Depression and the early 1970s and concluded that even during those hard Times no historical case existed where the safe withdrawal rate exhausted a retirement portfolio in less than 33 years.
And for most of us 33 years would easily cover our retirement. The idea behind the rule is that once you have approximately 25 times your annual expenses saved for retirement you should be able to retire with reasonable certainty that you could survive until death on your savings. Because at that point the amount that you take out for your annual expenses would be approximately 4% of your retirement savings. And when I say 4% of your retirement savings I mean your entire retirement savings anything that’s been earmarked to use only in retirement this includes 401ks IRAs and any other ways you’ve saved a nest egg for retirement.
For example if you had $450,000 in your 401k and $50,000 personal IRA then you would have $500,000 in all of your retirement accounts and your initial withdrawal on the first year retirement would be 4% of that $500,000 or $20,000. So some other factors that you’re going to want to keep in mind when using the 4% rule in addition to keeping an eye on your expenses, is to account for inflation. The 4% rule believe it or not actually allows you to increase the amount you withdraw to keep Pace with inflation. You can account for this either by just setting a flat 2% increase to your withdrawals each year which is the target inflation rate by the Federal Reserve or by just looking to see what the inflation rate was for the current year and adjusting based off of that. Now you might be wondering how this could possibly be I mean if you increase how much you would withdraw to keep up with inflation won’t you eventually run out of money? It’s a legitimate question but as it turns out no.
And it’s because over the long term the market goes up. Now there are a lot of numbers that are thrown around by financial advisors about how much the market actually goes up I’ve heard anything from 6 to 10% a year on average. I’m going to be conservative here and go with the 6% end of the scale. So let’s go back to the example I’ve been using in the video you start off retirement with $500,000 in savings, and in the first year of retirement you withdraw $20,000 or 4% of your savings. And I’m also using a compound interest calculator here, and it assumes that whatever you withdraw is withdrawn right at the start of the year.
So the $20,000 is going to be withdrawn on January 1st of every year. I’m only noting that because it makes it a worst case scenario you were to say withdraw $20,000 over the course of an entire year but you did it in installments of $1,600 each month you would be able to earn interest on the rest of the money that you hadn’t yet withdrawn throughout the rest of the year and thus you’re ending net worth would end up being a little bit higher than it will be in this example. So on January 1st you withdraw $20,000, meaning you only have $480,000 left in your nest egg. But over the course of the year the market goes up by 6% which means the value of your portfolio at December 31st would be $508,800. Now in year two of retirement you increase your withdrawal by 2%. So on January 1st of the second year of your retirement you withdraw $20,400. That brings your portfolio value down from $508,800 to $488,400. But again the market goes up 6%, which by December 31st brings the total value of your portfolio up to $517,704. If you were to continue to calculate this out for 30 years you’re ending net worth would be $787,716.90, almost $300,000 dollars more than what you started with in retirement! But of course this is just a rule of thumb so there are situations where you’re going to want to avoid using this all together.
One of those situations would be if your portfolio consists of a lot more higher risk Investments then say your typical index funds and bonds that are usually in a retirement portfolio. This is because obviously a higher risk investment can go down a lot faster than your typical retirement portfolios, which can be extremely devastating especially early on in retirement. Also this rule of thumb only really works if you stick to it year in and year out. And if you’re not going to be able to do that then you don’t want to use this as your retirement goal, because even violating the rule for one year to splurge on a major purchase can have a severe effect on your retirement savings down the road because the principal from which the interest and dividends that you get to survive is compounded from gets reduced. Let me give you an example of how this works: Say that in addition to taking out the $20,000 your first year in retirement, you decide to treat yourself with a new car and figuring that you’ll be traveling a lot during retirement you want to get one that’s good, big, and comfortable as well as reliable.
So for this example let’s say you get a new Toyota 4Runner for about $35,000. Now I know that you could probably find it for cheaper used, but not everybody likes to buy cars used I know my dad didn’t and besides this is just an example. So you drop $35,000 on a new car and you still have to have money to live so the $20,000 still does come out of your retirement, meaning that you only have $445,000 leftover. Now admittedly the market still does go up about 6% leaving you with a nest egg of $471,700 at the end of the year.
And even if you were to stick to the 4% withdrawal rate for the rest of retirement which, would be 30 years in this example, by the 27th year you would be taking out more than you earned an interest and dividends as well as how much the market went up. And by the 30th year of retirement you would withdraw $35,516, but with interest, dividends, and Market appreciation your portfolio would have only gained $33,209 in value.
And that could put you in a pretty dangerous position should the market go down for a couple years, or if you have some kind of medical emergency. Now I don’t want to make it seem all bad, I mean unless you retired early, after 30 years in retirement you’re probably in your 90s and don’t need the money to last very much longer and even in this example you still do end with $586,000. It could be worse right? However I do want to bring your attention to the difference that this made. This one purchase made your ending net worth that you could have left as inheritance to your children or grandchildren or even donated to charity go from $787,000 all the way down to $586,000, that’s a difference of over $200,000. And all that’s with just one splurge. But that’ll about do it for me I hope you enjoyed the video and if you did or if you learned something be sure to like And subscribe I’ve got a lot more of these Finance coming out in the near future as well as some more book summaries and other fun stuff.
But with that being said, thanks for watching and have a great day. .
As found on Youtube
Read More
Recent Comments