Below is something that I wrote in March 2015. I’m reposting it here to illustrate that always living below your means and investing the excess will build up wealth. As you earn more, it’s important not to spend all those extra earnings.
I graduated from college in 1992 and started working as an intern two weeks after I graduated. I was only earning $1700 per month. My rent was $550 per month, car insurance $50 per month (when annualized). When you add up all the other expenses, $1700 per month was not a lot for someone in their early 20s. I enjoyed my job, but, after about a month, I started projecting my financial situation into the future. I realized that I would be working for a very long time. I also realized that if I saved money and invested it well that I would someday be able to earn more from my investments than from my job. At the age of 22, this became my goal. Even if I liked my work, I could work; however, if I made enough of a return on my accumulated money, I would no longer be required to work. I now call this concept hiring the invisible worker(s). You can work for money, but you can also invest your money which is sort of like hiring someone to work for you without you having to work yourself. You don’t need to feed and cloth these workers; they don’t sleep, and they can work 24/7 without getting tired. As you get more money, you can hire additional workers. Eventually, you get to the point where your workers earn enough so that you can hire new workers at an increasing rate. So taking my salary when I started working which is roughly equivalent to minimum wage today, every $100,000 growing at 20% is an invisible worker.
So I opened my first brokerage account a few months after starting my job. I decided to save a minimum of 10% of my gross salary no matter what. This became the first priority, and I could spend the rest on my non-discretionary expenses and other things like vacations. I also focused on increasing my earning potential. I got two advanced degrees but made an effort to continue earning while going back to school. I got my first advanced degree part-time while working full-time. My employer even paid for this first degree. It was important to continue to save. My second advanced degree was a full-time program, but I continued to work part-time. At this point, I earned nearly as much working part-time as I previously earned full-time. I decided to take out low interest loans to fund the expense of my second advanced degree because I wanted my investments to keep growing and because I knew my pay would at least double when I resumed working full-time.
I ended up working in full-time day jobs for another ten years, always increasing my savings rate as my pay increased (sometimes saving in excess of 50% of my gross income). For me it was far more important to achieve financial freedom than it was to increase my spending on things that I didn’t really need. I quit my job in 2007 at age 38. It’s now been 8 years. I still consult in my field a bit, but on average I don’t work more than ten hours per month.
I’m posting this more for the younger people who might read this. I think they might find it useful. Most young people that I meet generally don’t plan ahead and most spend more than they need to. There are many paths to financial freedom. I believe that the path that I chose will work almost all of the time. I have found that I am very unusual in a couple of ways. First, delayed gratification seems natural to me. Second, I almost never felt a need to buy a nice car or spend much money on things that I felt were not needed. Third, I would plan ahead and set reserves for all my expenses; this is especially important for large periodic expenses like a new car. I would usually keep my car for 8-10 years and pay cash when I needed a new one. Fourth, I abhor high interest rate debt (low interest rate debt can be a wonderful thing if you invest rather than spend) and avoided spending on things I could not afford. However, I would take advantage of low interest rates if I could invest the borrowed money at higher rates of return than the after tax interest rate. Saving at least 10% of gross should not be violated.
So the next time you want to buy that new car, you might want to consider hiring another invisible worker instead.
Update: This was written about five years ago. In 2015-2016, I had a major financial setback that wiped out about 70% of my assets. After ten years of retirement, I had to go back to a day job in late 2017. I thought it would take ten years to recover, but my investments grew faster than I imagined, and I retired again in early 2019. Now, I don’t consult anymore and just spend my efforts on investing. I may write about my setback in a future post.
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