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How long to financial freedom?

It depends on your spending habits.
Spending less is more effective than earning more, because of the increased tax burden that comes with a higher income. Image: Shutterstock

So you want to be financially free? Of course you do. 

Okay, so the next question you are probably asking is how long is it going to take you?

Well, that depends on how much you earn, right? The more you earn, the faster you can become rich, and the faster you can tell your boss what you really think of Hawaiian Shirt Day, right? Wrong. Very wrong.

Here is something for you to ponder …

Imagine you are a top-rated doctor earning R200 000 a month. You have the usual six luxury vehicles and four houses with matching golf course memberships. You know, all the normal stuff that comes with the territory. The result is that you spend R200 000 a month.

Sounds like a pretty epic life. But you know what? I wouldn’t wish it on anyone. Because if you spend everything you earn, you will never be financially free.

Now this example may be a little extreme, but it illustrates a very important point….

The time it takes for you to achieve financial freedom has absolutely nothing to do with how much you earn, and absolutely everything to do with how much you spend.

In fact, how much you spend versus how much you earn is the only factor when it comes to figuring out how long it will take you to be financially free:

  • If you are spending everything you earn, you will have to work forever. You are a financial slave to your job, and without it, you will be sunk.
  • On the other side of the spectrum, if you happen to be in a position where you don’t need to spend anything of your income, then it means you have already achieved financial freedom and could quit your job right now if you wanted to.

Most of us are somewhere in between these two extremes of being able to quit your job right now, and needing to work forever. And that’s because you are saving a portion of your salary every month and putting it towards your retirement.

What’s your number?

The amount of savings you put away as a percentage of your income is known as your savings rate (here is a more detailed explanation on calculating your savings rate.)

Your savings rate is a really important number for you to know and to try improve because it is the only thing that determines how long it’ll take for you to become financially free.

To see how this works in practice, the chart below shows the number of years it would take to achieve financial freedom according to your savings rate.

Savings rate (%) Years to financial freedom
1 94.5
2 80.25
3 72.42
4 67.83
5 63.58
6 59.17
7 56.17
8 54.5
9 51.33
10 49.17
11 47.5
12 46.5
13 44.83
14 43.6
15 41.33
16 39.83
17 38.67
18 37.5
19 36.42
20 35.42
21 34.42
22 33.5
23 32.58
24 31.67
25 30.83
26 30.08
27 29.33
28 28.58
29 27.83
30 27.17
31 26.42
32 25.75
33 25.17
34 24.5
35 23.92
36 23.33
37 22.75
38 22.17
39 21.67
40 21.08
41 20.58
42 20.08
43 19.58
44 19.08
45 18.58
46 18.08
47 17.67
48 17.17
49 16.75
50 16.25
51 15.83
52 15.42
53 15
54 14.58
55 14.17
56 13.75
57 13.42
58 13
59 12.58
60 12.25
61 11.83
62 11.5
63 11.17
64 10.75
65 10.42
66 10.08
67 9.75
68 9.42
69 9.08
70 8.75
71 8.42
72 8.08
73 7.75
74 7.42
75 7.08
76 6.75
77 6.5
78 6.17
79 5.83
80 5.58
81 5.25
82 5
83 4.67
84 4.42
85 4.08
86 3.83
87 3.5
88 3.25
89 3
90 2.67
91 2.42
92 2.17
93 1.92
94 1.58
95 1.33
96 1.08
97 0.83
98 0.58
99 0.33

Assumptions: 12% returns, inflation at 6.28%, investment amount required calculated using the 4% rule

Some interesting observations from the chart above:

  1. For those of you with very low savings rates, some massive strides can be made by simply upping your savings rate by a few percentage points. For example, you can slash a massive 14 years off your financial freedom date by upping your savings rate from 1% to 2%. (Of course, going from 94 to 80 working years is still not going to cut it, but because the chart is exponential, there are some huge gains to be made at the low end).
  2. If a working career is considered to be 40 years, you need to save at least 16% of your income to make sure you will have enough at retirement age.
  3. Saving 42% of your income will allow you to halve the usual 40-year working career that most people accept.
  4. If you can save half your income, you can be done with work in 16 years. This means a 21-year-old could be financially free by the time they are 37!
  5. The really hard core savers can quit their jobs in less than a decade by saving two thirds of their income. This may seem like a real stretch, but a middle-income couple, starting early, could pull this off (by focusing on the expense triangle of doom, for example) and be done with their jobs before they even have kids …
  6. This chart assumes that you currently have no investments. If you already have some in the investment kitty, then you will definitely be able to achieve financial freedom faster than the chart suggests.

The conclusion from all of this is this: you don’t need a high income to achieve financial freedom, you just need to make sure you are saving some of your income every month.

Nowhere on the chart is there anything about how much you need to earn. The only factor is your savings rate.

The bottom line is this: the higher your savings rate, the faster you will achieve financial freedom.

In other words, your savings rate is where it’s at.

And there are pretty much only two ways to increase your savings rate:

  1. Earn more
  2. Spend less

A lot of people focus on the earning part. Now there is nothing wrong with this, but just keep in mind that it is quite an inefficient way of doing it, because you load yourself with an ever increasing tax burden for every extra rand that you earn. In addition, earning more often leads to spending more, and so it may not do anything for your savings rate.

I can appreciate that earning more money is a really attractive prospect, and it certainly seems far more glamorous than getting down and dirty into your spending, but you should only focus on the earning side once you have got a handle on your expenses.

Spending less is super-efficient – you get to keep all of your savings (tax has already been paid) and it will immediately give your savings rate a kicker.

Less spending means more to invest, and every rand that is invested instead of spent pulls that financial freedom date a little bit closer.

The equation is actually pretty simple:
This post was originally published on the Stealthy Wealth blog here
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Great article. Of course, it should be noted when working for a big company approximately 12% of your pre-tax salary is being directed towards pension contributions. So, taking this into account, you only need a little discipline to be saving the equivalent of 20% per month. However, there is of course a caveat: these savings is something different than “money for a rainy day”, like future university fees, foreseen car or house repair, or sending your alcoholic brother-in-law’s to rehab for the third time. What I am trying to say is, don’t be too optimistic about future expenses (and returns!) and rather leave some fat into your budget.

Good article but the problem is the devaluation of currency. When a currency like the ZAR goes from R7 to the dollar to R15 or R20 to the dollar and you become dependent on imports priced in USD you are losing at a huge rate like over 50% ! Cars are USD priced and houses are becoming USD priced too!Food imports go up and so that becomes USD based and you are losing losing all the time. Petrol prices are in USD and that affects all kinds of industries which have to transport food and goods all over. So a ZAR based salary to live and purchase USD priced goods and services is a big challenge to survival….oh wait then of course there is expropriation without compensation where they just take your assets like pensions ,savings and your land house etc……….

This is where inflation comes from, so I believe the conservative estimate of 6,28% takes all these devaluations into account. Also remember, the Reserve Bank’s mandate is to protect the value of the currency, so in theory at least, theay try to shield South Africans from major currency fluctuations by manipulating interest rates. Until our red overalls privatise it, that is.

Don’t work to be financially free – you will just end up bored. Been there done that.
Rather invest money saved in finding work you love doing.

He’s talking about being financially free, not retiring!

I just wish these ideas had been around a lot longer.

Earning passive income with no debt is exactly the way to go.

Then contributing by doing what one wants isn’t retiring its living!

Great article!

The Shockingly Simple Math Behind Early Retirement – Mr. Money Mustache

Financial Fitness Training is the answer. Not only can you be debt free but also understand investments. Learn how to take care of your money, not what some guy wants to sell you. We just won the coveted “Raging Bull Award” as well

After I read this article, I phoned SARS and asked if I can put 99% of my salary into an RA. They said sure, but I would still have to pay tax on any savings above 27,5% of income. If I wanted to save 99% of my income, I’ll’ll have to borrow, to pay the tax.

Then I phoned my broker and asked where I can expect to earn a real return of 6,7% pa in SA for the next 40 years (12% net nominal less 6,28% inflation plus 1% in fees). He was still laughing by the time I cut the call, so I don’t know what the answer is.

Then I asked my wife whether our our living costs will stay the same after we have kids in middle age and she asked me whether I’d been drinking.

As Einstein said, make things as simple as possible, but no simpler. Crazy assumptions, or ignoring tax, doesn’t help anyone.

The other obvious point not highlighted: the more you save, the lower your modeled lifestyle will be, both before and after retirement. So sure, if you can live off nothing, there is no point in working. We see plenty of those ‘retired’ people sleeping on city pavements.

Your broker doesn’t know what the market will do in the future.

If you put 99% in your RA it grows without dividends withholding tax in the account.

You and your wife determine your cost of living with kids. Many of us employ a wife with kids in our homes with after tax money.

You’re right, my (stock) broker doesn’t know what the markets will do in future. But he’s got a pretty good idea of what they won’t do. We may be surprised but I wouldn’t model my life on that.

The issue about saving more than 27,5% of income is that you have to pay income tax on the rest of your income, whether you put it an RA or not. The fact that you get tax free returns in an RA is irrelevant here.

Having kids will increase your cost of living, even if you make them work for their meals.

If the aim of this article is to get us thinking and to get us looking at our numbers then the article succeeded.
Unfortunately, those that needs this article the most will never get information like this. It saddens me.

So what is wrong with working? What is this issue with early retirement anyway? We look at the unemployment figures, and we say that people are lazy, they don’t want to work, that is why they are unemployed. At the same time, we are running up and down, working over-time and saving as much as we can, to be able to become unemployed as soon as possible!

In the meantime, we are creating employment opportunities for an entire financial industry that sells us the fallacy of early retirement.

The investor who bought $100 worth of gold in 1971 owns $4160 of gold today. If the same investor bought $100 worth of the Dow Jones Index on the same day, his shares will be worth $3367 today. Gold is another form of cash. That implies that cash performed better than shares over the last 50 years.

The point is – we are paying management fees to people who promise us an early retirement while they are underperforming cash. With cash, I mean the type that cannot be printed at will – gold.

Now I threw the cat among the pigeons….

I did a few quick sums and on the 99% savings rate, example – its unlikely that person will be financially independent in 0.33 Years. For example, if someone earns R250k per year and saves 99% of earnings, that would be (R250k*0.99*) or R247 500 saved after 1 year, at 12% that would generate an income of R29k per year, i.e not fin. independent just yet.

However, on an income of 250k at a savings rate of 66% the 10.8 years to financial independence looks more feasible.

The assumption in your R250k scenario is that you can live on R2500 per year (1%). After 4 month you have saved enough (R82500) to sustain that with a 4% withdrawal rate.

Good article. A financial consultant, Dave Crawford is the only person I know who has been able to quantify he above in an easy to understand manner. Personally I think his work in this regard has a significant amount of merit because it helped me and would enable most people to track their progress towards financial freedom and or early retirement.

Note – I receive no financial or other benefit from Dave’s success or failure.

Are all these percentages calculated on pre or post tax income?

Good question, answer is it doesn’t really matter. After CGT and dividends withholding tax were implemented it doesn’t really matter. If you want to spend 100k per month you have to pay quite a lot of tax before or after no longer earning a big salary.

If you want to spend 20k per month you can pay little to no tax in retirement.

So it only applies to high income, high tax payer, low expenders who later switch to low tax payers, low expenders. These folks are rare.

Thought provoking article.

Fair enough, I wonder what the real “fighters for economic freedom” would come up, if tasked to write in a similar article?

…what ideas will emerge from the grey matter underneath their spastically styled red berets, is anyone’s guess!

(…probably something resembling a spending/debt trap if you ask me)

Brilliant article. Absolutely spot-on. But people don’t want to hear it.

You can already see the trail of negative comments from people who don’t understand the concept and are desperately trying to convince everyone else to NOT try this, in case it works.

But it does work. Despite their negativity.

@Stealthy Wealth

With these rule of thumb guidelines, are the % pre or post tax?

On the Mr Money Moustache forums this question gets debated endlessly. I prefer to think of after tax as the denominator for the percentage, but that applies to me because I am working towards paying a low average rate of tax if the salary falls away.

The table in the article doesn’t count tax on withdrawal at all and uses after tax as the denominator.

You can get sophisticated by adjusting upwards in time to allow for the average rate of taxation currently applicable for a monthly lifestyle spend which matches your current spend as an estimate of tax after the salary falls away. But if you used before tax as the denominator it resolves that for you at today’s tax drag. So use that if you guess you will pay lots of tax after no longer earning the salary.

End of comments.





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