You’re automatically saving away money each month, right? It might not be much, but the act of saving is more important than the amount. If you’re not saving, stop reading this and go set up an “Automatic Savings Plan” between your checking account and a savings account. Even if it’s $1, just go do it.
OK, now that we’re all saving, let’s get down to my favorite step of this entire book: visually tracking your path to a day when you no longer need paid employment*.
Remember that chart we made in Step 5? If not, it’s my fault for not posting this book review quickly enough. But if so, pull it off the wall or load it up on your computer, because we’re about to add an AWESOME new line to it.
This new line is your monthly “investment income,” the money you’d live off if you didn’t have paid employment. Sounds like something only filthy-rich people can do, but I’m about to show you how everyone can have investment income, and how eventually it will be enough to sustain you.
The book gives the following equasion to figure out how much investment income you have:
(capital x long-term interest rate) / 12 = monthly investment income
Where “capital” is a fancy word for “how much money you’ve saved,” and long-term interest rate can be found here.
Having bored you with that math, a short-cut to finding your “investment income” is to replace the long-term interest rate with a flat rate of 4%, generally considered a “safe” amount to draw from one’s capital while still preserving the capital itself.
So each month when you plot the new points for “income” and “expenses”, add a 3rd point for “investment income” using one of the two formulas described above.
After doing the previous steps for a few months, your total monthly expense line should be a little lower and your income line should be a little higher. And when you start plotting the third line, it’ll be a little blip down at the bottom, for now. But eventually, thanks to your diligence and compound interest, you’ll reach a crossover point where your investment income is more than your monthly expenses.
It might take a while, but it’ll happen. It’s inspiring to literally see that you only need to work for pay for a finite period of time. At the Crossover Point you will be financially independent.
How long will it take? Depends on what percentage of your take-home pay goes into savings. Also known as your “savings rate”. At the bottom of this blog post by Mr. Money Mustache is a little chart that should help you estimate when you’ll hit the crossover point. Depressing Spoiler Alert: if you’re saving less than 25% of your take-home pay, it’s gonna be a while. But don’t let that deter you from saving what you can. If you follow the steps of this book, you’ll find some extra change under the proverbial couch cushions of your life more frequently then you think. Maybe it’s only 1% or even only $1 this month, but if you consciously work towards a goal of increasing your savings rate, while reducing spending, I guarantee you’ll see that “monthly investment income” line soaring up towards the crossover point.
* Many people call that “retirement” but I think the term is too confining. It really means you have a choice whether or not you have paid employment, and I’m sure it’s awesome. I’ll let you know when I find out about it first-hand.