How fast will a $20,000 annual budget make you a millionaire?

At some point, most everyone harbors fantasy about being a millionaire.  What most people don’t realize, however, is that nearly any frugally minded person, regardless of income, has the potential to reach seven figures.

I believe just about anyone can pare down to a $20,000 annual budget, not to mention become happier and healthier for having done so.  Once this goal is reached, it becomes all about how much you earn.  The following data represent the number of years people living on $20,000/yr and earning various incomes will have until they are millionaires.  These numbers are based on a couple of assumptions- first, that every saved dollar is invested; and second, that these investments will yield a 5% annual return.  Keep in mind, 5% would be an extremely modest rate of return for any balanced index fund portfolio.  The “Years Until $1,000,000″ decrease sharply with higher percentage gains.

Amount Earned* Amount Spent Annual Savings Years Until $1,000,000**
$25,000 $20,000 $5,000 49
$35,000 $20,000 $15,000 30***
$45,000 $20,000 $25,000 22
$55,000 $20,000 $35,000 18
$65,000 $20,000 $45,000 15
$75,000 $20,000 $55,000 13
$85,000 $20,000 $65,000 12
*After taxes. Inflation not taken into consideration. Hopefully earnings will rise concurrently with inflation, although this may not prove to be the case.
**Assuming a 5% annual return on investment
***The median annual personal income in the US is just under $45,000 (~$38,000 after taxes), so most people would fall either in this row or the one directly above/beneath it.

Being a millionaire will be really awesome. 

At a 5% return on investment you’d be earning $50,000/yr while sitting on your couch.  But you wouldn’t sit on your couch, of course.  You’d travel the world, learn to speak seven languages, read the entire Russian literary canon, build custom-made homes, or something of that nature.  If freedom is all about owning the hours of your day, nobody is more liberated than a millionaire.

As if this wasn’t enough good news already, you don’t even need to become a millionaire if you don’t want to.  Maintain your $20,000/yr. spending habits, and you only need to reach $500,000 to be totally financially independent.  Your 5% return would give you the $20,000/year you’d need to live on, and you would never even have to touch your principal (this number takes into account the taxes you’ll have to pay on your investment income).  In other words, the average American earning $38,000 after taxes and spending $20,000 annually would be able to retire after only 18 years.

There is a tiny revolution happening in the world of personal finance.  People are starting to realize that earning more money does not need to result in spending more in turn.  Thousands of people are learning just how fully one can live on only $20,000 (or less) per year.  These are the folks who will be retired at the age of 45 (or sooner), a full two decades before most of their peers.  It is they, not the guy driving a $50,000 car he bought on credit, who will be the envy of the neighborhood.

The good life is not about owning things, it’s about owning your time.  The less we spend, the sooner we take the reigns.

Can we thrive on $20,000/year?

Not too long ago, I thought that saving 10% of my income for retirement was a reasonable goal to aim for.  Despite what many “experts” may have said, it isn’t, unless you are ok with working until the age of 70.  I’m not, so I’ve got to set the bar a bit higher.  How high, you ask?  High enough to be financially independent, retirement-ready, by the age of 47 (20 years from now).

To meet this goal I’ll need to save 50% or more of my annual income from here on (see this brilliant post for a breakdown of the simple math).  I’ll likely lose 2 years of income to graduate school in my late twenties, so the real savings will take place between the ages of 30 and 46.  Given that I can probably expect to make around $40-60,000/yr during this period, I’ll be looking to limit my expenses to around $20,000 annually (perhaps ~$7,000 more if/when I add a child to the equation).  In other words, my financial independence will be contingent on my ability to earn $20/hr, while spending like a person making half that much.

If anyone tells you this can’t be done, they’re flat out wrong.  The internet is flush with examples of people living well below their means and cashing in on early retirement.  My personal favorite by far is Mr. Money Mustache, but Early Retirement Extreme is also great in its own way.  What “retirement” looks like in practice varies naturally from person to person, but essentially it’s about being able to choose how we spend our time.  Who wouldn’t want that?

For most people making $40,000-60,000 per year, there is no reason savings cannot meet or exceed 50% of total income.

The idea that people need more than $20,000 a year to survive and thrive is a fiction of the modern economy.  After all, the world as we know it, the world of daily car commutes, $6 lattes, $60 t-shirts, and $100/month iPhone plans, is but a sliver of the pie that is our species’ history.  Homo sapiens lived for many tens of thousands of years without coupling joy and self-worth to the accumulation of non-essential goods.   That we do so now is an aberration, a sharp deviation from the norm.  Unless we are to make the ridiculous claim that every single pre-industrial revolution human was completely miserable in the absence of modern material goods, we must recognize that the recipe for happiness was written in stone long before the onset of consumerism.

There is simply no room for modern luxury in any serious assessment of what we need to lead pleasant, fulfilling lives.  While we want a great deal more than the Cro-Magnon cave painter would have wanted 40,000 years ago, what we truly require to be content is exactly the same- sustenance, shelter, knowledge, companionship, and hard work.  Any notion that there are additional components essential to daily satisfaction is, by any rational account, misguided.

This is not to say, however, that all superfluous things should be avoided.  I myself paid $5 for a cup of coffee just yesterday.  It was a delightful break from my otherwise incessant penny pinching, and I enjoyed every last guilt-free drop.  Unnecessary expenses such as this will remain guilt-free in my book, provided I can stick to my 50% savings goal.

A false notion people tend to have about  choosing to live frugally is that doing so is somehow synonymous with a self-inflicted reduction in quality of life.  As it turns out, it is more often the case that the opposite is true.

There is a kind of magic in moderation.  Not only do you save heaps of money compared to your prodigal counterparts, you begin to savor and appreciate your acts of conspicuous consumption.  You look forward to that one beer immensely, and it tastes just as sweet by itself as an additional four would have combined.  Scarcity dictates value-  the less abundant a thing is, the more valuable we will perceive it to be (assuming we want it in the first place).  Willfully restricting spending on products/experiences we enjoy is a foolproof way to foster a healthy appreciation for these things.

I look forward to the day, twenty years from now, when I will finally own my time outright, but I’m in no real hurry.  As of now, I’m just enjoying the process of learning how to spend less and live more.  I no longer buy into the lie that my satisfaction is intrinsically linked to my spending power.

Now that I’ve had a taste of freedom from the confines of consumer culture, I’m hooked.  I truly don’t think I’ll ever look back.  I’ve found a path I intend to stay on indefinitely, and I sincerely hope that you’ll join me.

Dropping out of grad school is not fun

In July of 2012 I packed all worldly possessions into my car and moved to Philadelphia for graduate school.  I was living out a reality I had long dreamed of- admission to an excellent program, free tuition, and a sizable monthly assistantship payout to boot.  This all caused my ego to expand to Hindenburg proportions, and I was all set to go full steam ahead on the path to a career in academic psychology.

Then came a personal crisis. Everything felt wrong.  The people I met were fascinating and kind, the city new and exciting, and the program itself well organized and intensely focused on student achievement.  But it wasn’t for me.  I was uninspired by the subject material, even more so by the idea of a career writing research articles.  I saw so much passion around me, but felt none of my own.  I knew I had to leave, but I also recognized it would be a logistical nightmare.  I’d have to cut ties with the school, and, as a result, let down a score of people who were depending on me and invested in my success.  Then there was the lease I’d signed.  Would my landlord let me break it?  If not, I’d have no choice but to stick around.  Perhaps most stressful of all was the fact that I’d spent virtually every dollar I had to my name making the move East.  Leaving would essentially mean flushing about $2,000 down the toilet, not to mention I’d be returning home desperately broke.

Still, despite the many disadvantages, I felt deeply that leaving was the right move.  I had no idea what I’d do or how I’d manage to get by, but taking the plunge into the unknown felt vastly preferrable to sticking it out in a situation that made me miserable.  So it went that on a cold November day, little more than three months after arriving, I re-loaded the car and headed West, tail between my legs, ego reduced to ashes in the wake of the fiery explosion.

Rather than stopping to see friends, as I did on the way from Denver to Philly, I drove home at a break-neck pace and slept in dingy motels along the way.  I was feeling defeat in a way that I hadn’t previously encountered, and I needed it to be a solitary experience.  As such, it allowed me many hours to comtemplate where I’d gone wrong.

The conclusion I came to was that the disaster could be reduced to ego and impatience.  I aspired to make a mark on the world, to be a person of significance, and I was eager to start down this path.  The problem, of course, was that I had no idea what I wanted to do/be.  I longed for relevance, plain and simple, and was prepared to commit to just about anything to achieve it.  Applying to a top-tier graduate program seemed like a logical place to start, no matter that I didn’t feel the least bit drawn to research or academic psychology.  I figured I’d cultivate passion once I got there. Epic mistake.

Just because a door is open doesn’t necessarily mean you should walk through it.  I know that now, and I don’t suspect I’ll ever forget the lesson.

Today, one year after getting the news that I’d been admitted to graduate school, I find myself back in Korea teaching English.  In some ways this felt like a backwards move, but life here is simple and fun, if not completely satisfying, and I feel that I have the space I need to ensure that my next move is the right one.  I feel drawn to a career in school counseling, in large part because I want to help young people hatch creative, realistic, non-deluded education/career plans (if only I’d had one myself!).  If I’m still feeling inspired by this prospect in six months, I’ll apply for masters programs in counseling.  If not, who knows.  In any case, I feel well-positioned to make the right choices when the time comes.  I learned firsthand where misguided decisions lead, and I am more than certain that I don’t want to go there again.

Lets talk about money

There are only two conversations we can have about money.  We can discuss ways to get more of it/conserve what we’ve already accumulated, or we can talk about how best to spend it in exchange for goods, services, and experiences.  It is a largely generalizable cultural truth that we tend to be more comfortable with the latter, but why?

Some would argue that the capitalist system is designed this way by default.  After all, financial sensibility on a personal level can be detrimental to the bottom line of certain corporations.  Imagine the crisis at Cadillac headquarters if, all at once, every consumer in the world realized how utterly ridiculous it is to purchase a new Escalade.  Big businesses driven by discretionary consumer spending lose when people start talking personal finance.  Corporate profits in many cases are inversely proportional to the financial literacy of the general public.  The corporations run the government, the government runs the schools, and the schools design the curriculum.  Is it really so difficult to understand why personal money management isn’t core curriculum in every high school?

A less nefarious, but equally pervasive reason that finance has been excluded from the conversation is that most people tend to think spending money is considerably more fun, not to mention monumentally easier, than building wealth.  Appearing to be wealthy, even on a moderate income, is far more straightforward and exciting than actually becoming so.  This is why so many non-millionaires live in million dollar homes and drive luxury vehicles, while the average home price amongst Camry/Accord driving millionaires is around $320,000.  Becoming a millionaire is difficult- it requires diligent saving, wise investing, and incredible self-control.  It is a process that comes across to many as intimidating, boring, or both.  It is probably no wonder that we generally seem to believe reaching millionaire status is an entirely unobtainable goal.  We don’t like to talk publicly about subjects that make us feel inadequate, so we don’t talk about accumulating wealth.

But we should, because anyone can become become wealthy, and everyone should strive to.  We’ve been led to believe that money is what we use to make purchases, but this is only half of the story.  Money is also what we use to earn our freedom- the more of it we have, the freer we are.  Wealth is often an inevitable precursor to choice, and choice is what freedom is all about.  I’m not talking about choosing what to buy, but choosing how/where to spend our time, and with whom.  To be poor is to be cornered, a slave to circumstance.  I’m still at this stage, and let me tell you, it’s not a good time.

I used to believe that money breeds discontent.  This made sense for a long time, as so many of the big spenders I knew seemed to be desperate and unhappy beneath their buffer of luxury.  What I’ve since realized is that money itself will not make a person miserable or content, it is what that person does with the money that counts.  It seems to me that the reason the happily rich don’t make headlines is that they lead remarkably simple, quiet lives.  They spend their time with the people they love, doing the things they love, perfectly content in the absence of wasteful spending.

So let’s talk about how to be more like these people.  Let’s talk about how to be frugal and how to create a budget.  Let’s talk about investing, about how we’d choose to spend our lives if money weren’t an issue.  Let’s figure out exactly what we need to be content and forget the rest.  If we have this conversation, we inch ever nearer to true freedom. 

How 5 years teaching English in South Korea can make you a millionaire

Teaching English in Korea for a year or two is becoming an increasingly popular option amongst recent college graduates.  Reasons for moving abroad vary from person to person, but generally can be distilled down to some combination of the following- a desire to travel, a need to pay off debt or save for some future expense, a yearning to be culturally immersed/learn a language, and/or not being able to find a job at home.

Indeed, all of these are good reasons for moving abroad, but there is another reason, dare I say a significantly better reason, that almost never gets discussed.  A few years of diligent saving in Korea has the potential to make you a millionaire by the time you retire.  Anyone with a 4 year degree can do it.  Here’s how-

The average starting salary for a new teacher in Korea is around $2,000 USD per month.  This may not seem like much, but keep in mind that your housing and airfare are entirely paid for by the school.  Not to mention, the typical pension payout and end-of-contract bonus ends up amounting to an additional $4,000 annually.  It is widely agreed that a frugal person can save $12,000 per year on an entry-level salary in Korea.  I’ve done it, as have many of my friends.  This year, my second here in Seoul, I plan to save in the neighborhood of $15,000 (while paying $275/mo. in student loan payments).

For the purposes of our millionaire scenario, lets say you are 23, plan to save $12,000/year, and stay exactly five years.  If you were to deposit your savings into a non-interest earning checking account back home, you’d walk away with $60,000 at the age of 28.  But you’re not going to do that.  You’re going to put your money into Vanguard’s S&P tracking index fund, VFINX, which has averaged a 10.79% annual yield since its inception in 1976.  In doing so, you will have effectively invested in 500 of the largest companies in the United States.

Now, we’d all become millionaires in fairly short order if the market continued to average 10.79%, but let’s not count on this.  Let’s be conservative and plan on 7% averaged growth over the the period of our investment.

A $12,000 annual investment in VFINX, assuming 7% growth, would yield $73,840.  Just like that, we’ve made an extra $13,840!

Our next step is to let that money sit until the day of our 60th birthday.  On that day, without having invested a single penny beyond the original $60,000, we’d be cashing in on about a $680,000 return, and that is only if the market averages 7%.  Here are the amounts for various other market return scenarios-

4%- $269,296

5%- $369,434

6%- $505,108

7%- $688,554

8%- $936,000

9%- $1,268,722

10%- $1,714,946 (this would represent growth typical of the last 100 years)

11%- $2,311,799

In other words, even in the worst case scenario, we’ve nearly quadrupled our money.  This is all very cool, but this is a highly hypothetical scenario, and there are three major caveats-

Caveat #1- It is not likely that you’re going to want to save all that money and just let it sit for 33 years.  Chances are, you’re going to want to use some of that $73,840 to travel, pay for a graduate degree, put a down payment on a house, etc.  So let’s say you only invest $50,000 and keep the other $23,840 to spend.  Even then, our investment (assuming 7% gains) will have yielded nearly half a million dollars by the time we’re 60.

Caveat #2- What about inflation?  It is true, $500,000 today is not the same as $500,000 in the year 2046.  Half a million will still be half a million, but it will probably  feel more like $200,000 does today.  The thing is though, $200,000 is still a lot of money, and it is far more than most 60 year old people have in the bank.  Which leads me to caveat # 3…

Caveat # 3- You, being the financially savvy person you are, would never dream of ceasing to invest at 27!  What’s more likely is that you’ll go back to the States, get a reasonably well paying job, and continue to invest at least $12,000 annually until you are 60.  Do this, and even at 7% growth, you will have made just over $2 million.

If there is one lesson to be learned with regards to personal finance, it is that building wealth is less about making a lot of money than it is about learning to live simply, invest early, and invest wisely.  Doing these three simple things, ESL teachers in Korea can put themselves on the path to financial prosperity.

Unfolding time: in defense of long-term life and travel abroad

ImageLiving in Korea in 2010-11 I had the peculiar feeling that the passage of time was somehow slowing.  Everything I’d been told about adulthood suggested that my years would pass in an increasingly brief blink of an eye, and yet, much to my delight, life in Seoul somehow seemed to have a reversing effect.  Compared to the fifty-four months I spent in college, which had since become muddled in my memory, each indistinguishable from the next, my twelve months in living in Asia felt like a veritable eternity.  From this experience came a life-changing realization: there are two types of time, but only one that truly matters.

The first definition of time is the kind you find on a watch, “real-time”- seconds, minutes, hours, etc.  Real-time is the same for everyone.  American babies born today can expect to live about 80 years.  They have little control over their real-time lifespans.  They do, however, have a surprising level of control over the second, seldom acknowledged, type of time, what may be called “perceived-time”.

Whereas real-time dictates the number of months in a year, perceived-time defines the pace at which these months seem to pass.  A year-long round the world trip will inevitably feel quite different, temporally speaking, than a year spent working in a cubicle in one’s hometown.  While the cubicle lifestyle may lead to a considerably more stable existence, those willing to accept the unpredictable nature of the expat/travel lifestyle will be rewarded by an expanded sense of time.  Joshua Foer, author of the immensely recommendable Moonwalking with Einstein, describes the phenomenon this way-

“Monotony collapses time; novelty unfolds it. You can exercise daily and eat healthily and live a long life, while experiencing a short one. If you spend your life sitting in a cubicle and passing papers, one day is bound to blend unmemorably into the next – and disappear. That’s why it’s so important to change routines regularly, and take vacations to exotic locales, and have as many new experiences as possible that can serve to anchor our memories. Creating new memories stretches out psychological time, and lengthens our perception of our lives.”- Joshua Foer, Moonwalking with Einstein

William James, the father of American psychology, had this to say on the subject in his 1890 Principles of Psychology-

“In youth we may have an absolutely new experience, subjective or objective, every hour of the day. Apprehension is vivid, retentiveness strong, and our recollections of that time, like those of a time spent in rapid and interesting travel, are of something intricate, multitudinous and long-drawn-out. But as each passing year converts some of this experience into automatic routine which we hardly note at all, the days and the weeks smooth themselves out in recollection to contentless units…”

James touches on an essential point that is often lost on the highly mechanized and routinized modern world.  Life will be memorable only to the extent that we put forth the effort to make it so.  Stability and routine may have their allure, but to over-embrace those things is to subject oneself to an unnecessarily “collapse” of time.  We often lament that “life is too short”, and yet so many people do the exact same thing day in and day out, failing to realize that the shortness of life is highly subjective, not to mention entirely dependent on personal choice.

I love those two quotes, because they serve to justify my relentless pursuit of movement.  Make no mistake, my choices have lead to certain disadvantages, but I consider these a minor price to pay for the assurance that I am leading a full life.  Truly, there is nothing that terrifies me more than the passage of time.  Traveling is my way of escaping, or at least forgetting, the fact of mortality.

To choose a life on the road is to embrace a life of instability, and certainly this isn’t for everyone.  Thankfully, one does not need to move to the other side of the world to have memorable experiences.  A robust life can happen anywhere and take any number of forms.  Indeed, I know a few people who rarely leave their home towns and yet seem to be leading a life every bit as rewarding and memorable as that of my travel minded friends.

That said, the distinct advantage of a life of movement is that novelty becomes the rule, rather than the exception.  Whereas those chasing the American dream will have to fight for new experiences, the nomad, by default, leads an existence defined by originality.  Our investment in chaos pays the dividend of a uniquely expansive perception of time.  And in the end, perception is all that matters.