This blog writes a lot about planning and working towards the future, but today’s post is going to do the opposite. Today I am going to reflect on where I have been, where I am, and what it means. The origination of this post starts years ago, long before I had a decent net worth or a high paying job. In fact, it starts before I even had a job, with my first true learning about money. That lesson started with a simple saying, Money Begets Money.
In the beginning Savings was not my Goal
When I started my financial path, I had no concept of frugality, limiting spending to what I valued, and I did not even spend much time reflecting on savings. Sure, I was never a prolific spender. There was always something being saved for the near term, I never spent more than I made. But my plans and my directions were not set around Savings.
Money Begets Money: an earnings slant
My focus was instead heavily slanted towards earnings. I had at a young age learned that the more money you had the more money you made. Simply put, Money begets Money. I did not at the time think of such things as net worth where I could save my way to having the money to earn more. Instead I turned towards finding a high paying career I enjoyed and maximizing my income. I, at the time, assumed higher pay led to investing and investing lead to Money begets Money.
Earnings lead to Savings
In my case the earnings ultimately lead to savings. I was never a natural spender as noted above. As a result, as my income grew I put ever increasing amounts aside. This was not a conscientious save more endeavor at first, but simply an aspect of whom I am. Eventually I noticed my net worth as a form of Money begets money.
Money begets Money: The Savings slant
As I accumulated a higher Net Worth compounding interest took hold. The simple concept is that properly invested your money earns interest. That money builds exponentially on itself eventually creating more money passively through no work effort of your own. How quickly does it build? Well I spoke some time ago about the Rule of 72. That is, if you divide 72 by the interest rate you receive then your money will double in the resulting number as defined in years. In other words, passive Money begets money, similar to active earnings. Eventually I took notice and began to focus on both sides of the equation, earnings and savings, to drive creating more money.
Savings and Earnings Combined: Where does that bring us
After a decade of pushing forward with this combined Earnings and Savings slant to drive investing I began to significantly ramp up my personal Money begets Money scenario. As I recently wrote our money has now surpassed 19x annual expenses excluding home equity. Not quite financial independence, but secure. But just how secure? Let’s pass in to present day.
Today: Money begets Money and Cruise Control
It’s a well-known statistic that the stock market has grown at a rate of 7% a year after adjustment for inflation from 1950-2009. If my own expenses adjusted only for inflation and history holds then based on the rule of 72 the amount of annual expenses we had in assets would double every 10 years. That means in 10 years, at 46, I would have 36 years of expenses. At 20, age 56, it would be 72 years. And at 30 years, or the average person’s retirement age of 66 I would be sitting on 144 years of expenses. Mind you this is all without ever saving another dime. I know life expectancy grows every year, but I seriously doubt I will still be breathing at 200 years old (assuming the money does not continue to grow) when I would theoretically need to go back to work.
Below Average Stock Market, still Money begets Money
Even if you believe the stock market will be below average, perhaps returning 3.6%, it would double every 20 years. My assets would then become 36 years of expenses at age 56. By age 66 I would have a full 53 times expenses without lifting another finger to save. The realization that quickly takes hold when I do this math is I have already in many ways won the game. I could put the whole thing on cruise control and coast to retirement at normal age.
Money begets Money: The clear point that starting early is key
The thing about all this is it defends strongly that original teaching. Money begets Money. It also points to the power of compounding and why you should start early. By your mid-30s, even if you are not considering early retirement you will be sitting pretty for almost any of life’s surprises. Money ceases to be a worry, at least in the traditional sense.
Don’t Take your foot off the Gas
A note before we go on, this all assumes I do not need to tap my assets before 66. Life is full of surprises. There is no guarantee I can work until 66. As such I have things like insurance plus I continue to save on top of the amount I have already saved. I.E. I would not recommend even if you are in my situation, letting off the gas pedal completely until you reach your goal.
Now do not get me wrong you should start early, but this blog has written numerous times that you should not deprive yourself to reach the above point or beyond. There is no guarantee that I or anyone else will make it to 66. That lack of a guarantee means that if you do not enjoy the journey of life then you likely will waste your life. That’s where conscientious spending habits like only buying what you value come in.
The Point of this Post
Now that I have written a good 973 words on the subject let’s get to the point of this post. I was recently discussing with my wife the possibility of purchasing a camp in Maine. This is something we’ve discussed numerous times as we travel to Maine every year for a week with my in-laws. My wife’s family has been doing this at the same site in the woods since before she was born. Each year we discuss it, find no properties we like, and it is forgotten until the next year. This year was no different, except for the question my father in-law asked me.
The Question: Vacation Home and Savings
My father in-law knows of this blog. He also knows of my frugal tendencies. As such he simply asked how I could justify spending $150-200K on a 4 month a year vacation home in the woods on a lake. Now let’s forget the part of buying what I value, as I certainly would value such a home. That’s a deeply personal question of which I will spare you the details. The question here is more about having the funds and not upsetting my financial applecart.
This may come off as a brag, though not intended to be. It was more of a personal realization. As I thought about his question and how much 150-200K is, even in the context of our personal savings my mind first saw his point. I said 200K, man that’s multiple years of savings or working. That could buy so many things. But then my brain shifted to the rule of 72. Our current financial situation. The fact that if we ever do buy that cabin it would be mostly a one-time expenditure (taxes and maintenance not withstanding).
I ultimately came to realize that such a one-time expenditure is not all that significant in the context of our current financial position and life plan. If the perfect property ever shows up and I am serious I should not even hesitate. I am not looking to early retire, and the course is set on cruise control. The home would only impact that course if there were repeated or multiple such purchases. It might also impact me if I had near term plans to cut my career. Since neither are true I’m in a position where I have free reign to act should I choose.
The Realization and my existing Story
This all brings me to my ultimate point here. I have made it in passing in my story of my own choice in cars, but it still holds true. You should only buy what you value, so you do not waste money. But for the most part if you are smart about money you can buy anything you want, just not everything. You must pick and choose. If that choice in my case ends up being a cabin, so be it. It all starts with beginning young, increasing earnings and savings. Then making smart choices. But there is nothing to say you cannot indulge along the way.
How have you indulged? Have you reached a point where Money begets Money?