The fundamentals of personal finance are pretty simple: spend less than you earn, save the rest, invest in low-cost index funds, and always consider the costs vs. benefits of your actions. A while back, Jacob at Early Retirement Extreme put a fresh spin on the consequences of “spend less than you earn and save the rest” that I found irresistibly compelling.
If you live off of X% of your take-home pay while saving the rest, you can take (100-X)/X years off of work. Ignore the algebra for now and take a look at some examples below.
|If you live off of X% of your income for one year while banking the rest
||You can take X full years off from work (assuming your expenses are constant – more on this later)|
It’s rare that I’m taken with such a blinding vision of the obvious, but this presentation of such a simple algebraic rule struck a chord with me. We were two young professionals with minimal expenses and working high-paying jobs. We had inadvertently found ourselves living in a pretty attractive row of the above table, and the consequences of that reality were staring us in the face. If we stuck with our jobs for a couple of years while keeping the income effect at bay, we would have more than enough time off to both enjoy ourselves and figure out how to earn a decent living in a way that fit best for us.
Are you as taken as I was (and am) with the simple table above? Then let its message start guiding your actions. Take a hard look at your finances, put together a budget worksheet, and save with an immediate purpose – not having to work. That is the ultimate financial freedom and for me defines working to live.
posted by jayhorowitz