When I talk to friends and family about money, reaching financial independence and retiring early, one argument that comes back often is:<\/p>\n
\u201cWe\u2019re not like you\u201d<\/p><\/blockquote>\n
Or its variants:<\/p>\n
\u201cI couldn\u2019t change jobs\u201d<\/p><\/blockquote>\n
\u201cYou are smarter\u201d<\/p><\/blockquote>\n
\u201cFor you it is easy, but not for me, I am average\u201d<\/p><\/blockquote>\n
I know you can\u2019t change people who don\u2019t want to change, but gearing up for an average life is dangerous. I hope you don\u2019t wait until you\u2019re 55, with no money saved up for retirement and a $1,500 a month job to hear me out.<\/p>\n
We live in a society that promotes the cult of average. Making good money is taboo. You have to live like your peers, take a huge amount of student loans, buy a house roughly the same size<\/a>, and have 2.3 children. I actually think being average is a bad thing.<\/p>\n
What your average retirement looks like<\/h2>\n
Getting average grades in college will set you up for an average job, and if you never question the status quo, an average retirement. And it doesn\u2019t look great.<\/p>\n
The median income in the US is around $54,500 (2015 numbers<\/a>). That means half of the American households (not individuals)<\/em><\/strong> make less than that. The average savings rate<\/a> is just over 5%. Saving 5% of an average income, or $2,700 a year from age 25 to 65 will allow to retire on a $167,055 nest egg (calculator used<\/a>), if for once, you were above average and invested in a high interest saving account at 2%. That will barely allow you to keep up with inflation though.<\/p>\n
If you want said nest egg to last until you die, you will be able to withdraw only $6,682 a year, or $556 per month. Add to that the average Social Security retirement check of $1,287<\/a>, provided such a thing still exists 40 years from now, and you are looking at a retirement income of $1,843.<\/p>\n
Not bad, but I sure hope you will have finished paying your mortgage<\/a> by then. And will never get sick, or need terminal care. And that you\u2019ve already had kids, or that they won\u2019t need support for college or anything fancy. I hope you don\u2019t like to travel, play golf, or take your family out for diner.<\/p>\n
And once again, that is if Social Security still has your back 40 years from now, otherwise on $556 a month, I hope you\u2019re ready to relocate somewhere really cheap<\/a>, or happy to eat dollar store canned soups for the rest of your days.<\/p>\n
Breaking out of average<\/h2>\n
You have three ways to break out of average:<\/p>\n
\n
- Become an above average saver<\/li>\n
- Become an above average earner<\/li>\n
- Become an above average investor<\/li>\n<\/ul>\n
Since you\u2019re not making a ton of money as of today, let\u2019s just go over the saving part quickly, and try to stop comparing to our average friends, and the things they buy they don\u2019t really need.<\/p>\n
The dollars you spend on stuff are after tax dollars, meaning you actually need to earn about 40% more than the cost of the item to afford it. Just leave the money in your account and we\u2019ll find a good use for it.<\/p>\n
Don\u2019t worry about what people say, just picture yourself enjoying retirement while they\u2019ll have to wait until age 70 to retire, if ever.<\/p>\n
Focus on your earnings<\/h2>\n
Your best leverage is to start earning more money.<\/p>\n
Yes, it is hard to do, and it takes time. But a one time $10,000 raise at age 35 means $300,000 more earnings over the next 30 years.<\/strong><\/p>\nA one time $10,000 raise at age 35 means $300,000 more earnings over the next 30 years. <\/a><\/span>Click To Tweet<\/a><\/span>\n
Now we\u2019re talking. There are many ways to earn more money<\/a>.<\/p>\n
You can:<\/p>\n
\n
- Be the best employee you can and ask your boss for a raise<\/li>\n
- Shop around for a similar job that pays more<\/li>\n
- Do the strict minimum at work and start a side hustle<\/li>\n
- Freelance in another field<\/li>\n
- Teach or tutor in your field or your passion field<\/li>\n
- Take a night class or an online course to improve your skills and get a raise (find free courses<\/a> or ask your boss to pay for it)<\/li>\n<\/ul>\n
Make your money work HARD for you<\/strong><\/p>\n
Becoming an above average investor is not as complicated as it sounds. You need to make your money work HARD for you.<\/p>\n
While investing the $2,700 average savings at 2% per annum only gives you $167,055 after 40 years, finding returns of 8% (which is under the market\u2019s average long term return) will drastically improve your retirement pot to $796,669.<\/p>\n
Once again, you have a few hacks. Here are ten to get started.<\/p>\n
1. For an instant 100% return on your investment, take your company match and fill your 401k<\/a>.<\/p>\n
2. Keep filling it since you also get a tax saving.<\/p>\n
3. Focus on all other tax deferred or tax free savings accounts you qualify for.<\/p>\n
4. Invest in low fee index funds thanks to a low cost broker or robo-advisor<\/a>.<\/p>\n
5. Keep a little buffer in an instant access savings account. Once you start making your money work harder, it is painful to see idle cash sitting there, but it is better than having to sell low in an emergency.<\/p>\n
6. Make sure you look every year for the best deal in both brokers and high yield savings accounts (if you’re not getting at least 1% in your savings account, consider switching to a bank that actually pays you to save<\/a>).<\/p>\n
7. Pay yourself first. Have your savings disappear from your paycheck on the same day the money hits your account.<\/p>\n
8. Forget about your accounts. Studies found out even fund managers have a hard time beating the market. So just let your accounts sleep and grow while you focus on making more money.<\/p>\n
9. Find more sources of income<\/a>. Such as real estate (that can be fully passive with REITS or hands on with flipping<\/a>\u00a0or rental properties), an online business, etc. While some of these\u00a0income ideas\u00a0may have a higher learning curve and higher risk, you may get better returns on them.<\/p>\n