Finance, personal finance, business finance, retirement, investing all of the above I find fascinatingly interesting but also completely mystifying. I probably shouldn’t because the overarching principles and ideas are painfully simple.
Spend less than you make. Do something wise with the leftovers. It really is as simple as that.
All of the mystification and grey area show up in the form of, what is the wisest thing to do with the leftovers. And, how in the hell do you actually save enough? Modern society as a whole is geared towards making us all consumers.
There are vast bodies of work constructed by thousands of finance professionals that advocate saving at least 10% of your income. Then putting this savings to work in some form of tax-deferred index fund. Easy does it – the hardest part of this is actually getting in the habit of saving the money, which after you have done is pretty easy.
The Conventional Wisdom Does not Work for Entrepreneurs
The only problem with this approach is that it doesn’t really fucking work. Unless you start when you can’t afford it, aren’t really wise enough to put much effort into it and continue until you retire. Rob your hard earned tax-deferred savings once or god forbid twice over the course of your saving career and you can literally ruin your retirement.
I am quickly nearing 40 years old. As a young man optimistically deposited money into IRAs when I started receiving my first real paychecks during college. Several years later as a young man with a family going through hard times I was forced to cash out those IRAs to cover basic expenses.
For the next 10 years or so I worked for companies that didn’t offer any type of retirement savings plan. When I finally did start to accumulate some 401K savings of substantial size much of it was borrowed to put a down payment on a house. So here I sit. Almost 40, with retirement savings that will be far less than sufficient to maintain our lifestyle. Aside from that, I have no interest in working a JOB until I am 50, 60 or 70.
The conventional wisdom about saving for retirement has left me short.
Good thing I have a business. Good thing I am attempting to change my views about money, savings, and investing.
I recently read the first article I have ever seen about how entrepreneurs should approach financial independence. The advice is totally different from the conventional wisdom. It outlines a clear path that will allow entrepreneurs to quickly take advantage of compound interest while developing a disciplined approach to investing.
The skinny – Save 50% of your post-tax earning until you reach a savings level that is equal to 10X of your current annual income. At that point, you reach a level where your decision making process evolves and new opportunities open to you. You have options.
Save 50% of Your Annual Earning.
Business owners expect their money to work for them. To the tune of at least 33%. Possibly up as high as 10,000%. When compared to the 6-8% return that is commonly referenced in financial literature as what you can expect from your index funds. You can imagine where a business owner thinks they should invest their money.
My benchmark ROI for money spent in my business is that I must see at least a 33% ROI and that is at the very bottom. There are a variety of investments I could make that could have a significantly higher ROI.
So, as my business grows and as I proceed down this path of full-time entrepreneurship. I will be striving to hit the 50% savings benchmark. Will I make it the first couple of years? I doubt it. Lifestyle creep has already hit my family pretty hard and we are going to have a hard time ratcheting back expenses. In all actuality, it would probably be easier to increase income to a level that would allow for a higher savings rate. After all, you can only cut expenses so far.
To make all of this happen I will be developing a savings plan and target savings goals that will allow me to reach this level of savings.