STEP 3: Save more each month so I can take an INCOME from my savings (take less out of the account than the interest)
So… Adam is paid 30k (nice easy numbers) and takes home £2,000 per month after tax and NI.
If he can live on £1000 per month, then he needs to invest the remaining £1000 each month until he has enough saved up so that he can withdraw £1000 per month from the savings (this basic assumption assumes zero state pension and no company pension of course).
When can he retire? In about 17 years! (at the inflation and tax reduced rate of 5% from my first post).
So, he can retire at 50, instead of 65!
If he can live on £900 per month, then he only needs to save until he can take that £900 back out of the investments.
That means retiring at 47! By saving an extra £25 per week, he can retire TWO YEARS EARLIER!
These savings calculations don’t take pay rises into account. If he gets a pay rise of 5% per year, he can retire at 45
Of course, these are all pretty simplified calculations, and I promise to show you a nice spreadsheet of the potential for returns from the investments over the years once I have them.
Motivating your money by motivating yourself
A mantra you will all of heard of before: Save more than you spend. It’s so bloody true. Even better is to save way more than you spend. What’s more important to you… being able to spend your time doing what you want to do (including spending actual time with your kids), or having that shiny iPad mini, that you’ll get bored of by the end of the month??
Next post: Retire, by working 1 day less per week…
STEP 2: Make my money work for me, instead of me working for my money
Treat your money like employees… each and every pound coin can work for you, quietly beavering away in the background whilst you get on with your life. Eventually these pound coins have made copies of themselves, then you have two coins working to make two more. It’s called saving and investing. So you can spend more of your time doing what you want to do, instead of running back and forward to that tap all day long to keep filling that leaky bucket.
I am going to use this blog to rant, and occasionally rave, and try and change the perception of money that you have. We all know that we should be saving money, and the majority of us have a bit of cash saved up for emergencies, but most of us have our cash sat around at home in little piles I like to call ‘stuff’. Stuff we used for a little while, but is now not doing a damn thing for us.
Instead of buying ‘stuff’ and draining the bucket dry every month, look at what happens if you don’t spend every pound coin and instead invest some of it. I’m going to use some numbers that you won’t agree with, because banks want to make your pound coins work for them and not for you (banks borrow money off of you – your savings – and loan your money right back to others at higher rates than the interest on your savings, it’s how the whole banking structure works). And when was the last time you went into a bank and they told you to go to another because their competitor had better rates?
The numbers I am using are the accepted rates of return on putting your money into low risk stocks and shares, and I will give you some links so you can check this shit out for yourself. I’ll be writing another post soon explaining a little about these things.
Your employees and the miracle of compound interest
I am using a rate of 5% for all of my calculations, which is about what you can earn if you invest in low risk shares that give a dividend (the companies you own pay you some of their profits each year, how cool is that?!?!?), and after tax and inflation (although we can get around that nasty tax pipe in our bucket by using a stocks and shares ISA). This rate is not a short term rate, but rather the average over 10 years. Some years it will be a lot less (maybe even negative) and some years it will be a lot more. The real average is around 7% (after tax and inflation) but I want to under estimate my savings so that the reality is a nice surprise!
Here’s a scenario for you: I want to buy that new Xbox game (you know the one, it’s awesome, lots of blood and gore and violence. Excellent!). It’s £40 online. But I don’t buy it, instead I invest that cash. And I normally buy 1 game a month. So, let’s assume I am now buying small bits of lots of companies each month (5% growth shares).
If I save £40 a month, and the annual interest is 5% (but paid monthly), it works out as an annual rate of 2.5% of the total I have saved during the year (no, really, it does!). Or a 5% rate at half the yearly savings of £240.
So, £40 per month, x 12 months = £480. After 2.5% interest that has increased to £492. In year two I’ll earn the full 5% on the previous year’s $492 (taking it to £516.60) , plus another £492 from the monthly savings!
End of year 1: £480 * 2.5% = £492
End of year 2: £492 * 5% + £492 = £1008.60
End of year 3: £1008.60 * 5% + £492 = £1551.03
End of year 4: £1551.03 * 5% + £492 = £2120.58
End of year 10: £6188.32!!!!
If I had just stuck the £40 per month into a standard savings account that matched inflation (so basically 0%, don’t forget that my 5% is already taking inflation into account). I would have only had £40*12*10 = £4,800
So, my hard working pound coins, working with compound interest, have made me £1388.32!!!! At today’s value!!! And do you know how much work that cost me? 2 minutes to set up the direct debit.
If you absolutely positively cannot do without the game, sell it after a month for £30 and invest that instead! I have a shit load of games sat on my shelf that I played for a week and never go back to! If you really like a game, sell it as soon as you buy a new one, and then buy another copy in 6 months time for £10. You have then bought the game for £20 in total, instead of £40! (Really, work it out )
Stay tuned, for their will be more money motivation tips (make those bitches work for you!). Same bat time, same bat channel! (Batman TV series reference.. get over it!).
Retiring early, really early!
I want to retire early (like, really really early!!!!). I am aiming for mid 40′s. I want to spend my time doing the things I want to do (learning carpentry has always been high on my list of things to do… never had the time! Don’t judge me ). So how the hell do I make a shit load of money so that I can retire early? I’m not especially smart, and I’m not a football player who makes £50k a week. But I do have a calculator, and a working knowledge of how banks make money, and the desire to retire early. So, instead of just trying to work harder, I am going to work (and live) smarter. And I’m going to tell you how I plan on doing it… step 1 is below:
STEP 1: Stop giving the government, banks and corporations all of my money!
I have realised something recently: I am wasting my money. Every day. I’ve been doing it since my first pay check, I’ve known how stupid I’ve been but been unable to stop. Because I want stuff. I want a new Xbox game or DVD, I want a glass of wine and dinner in a restaurant. I want gadgets that I can show off to my friends (new iPhone!).
I have also realised that because of this, I will be working forever. Constantly striving to refill my cash bucket that has big holes in the bottom. Some of these holes have big hose pipes back to the government’s bucket, and some have hose pipes that go to company’s buckets. Most of the holes simply let my cash drain away into the ground (stuff I own but don’t use). One hole does have a small pipe into my savings bucket, although that also has a small pipe back to the government tax bucket! How the hell do I keep this bucket full so I can live my life without running back and forward to the tap (i.e. working my ass off), and retire early? I need to plug some of these holes (or at least make them smaller), and find some more taps to help refill it…
Stay tuned for rants, reviews, realisations and realism! Oh, and a reality check to the financially stupid out there (you know who you are!!)