Chapter 33
My path for my kid: The first 10
years
My daughter recently graduated from college. This is the early life financial path I suggest to her. But you don’t have to be just out of college or in your twenties to implement this plan. If you are older and looking to make a change toward wealth, think of it as a ten-year plan.
Avoid debt. Nothing is worth paying interest to own.
Avoid fiscally irresponsible people and certainly don’t marry one.
Spend the next decade or so working your ass off building your career and your professional reputation.
This is not meant to suggest you must be some sort of office drone. Think of your career in the most expansive of terms. The possibilities are endless.
Take those low-cost college living skills you’ve honed and use them to pursue any number of new adventures.
Don’t get trapped by an expanding lifestyle or unwind it if you already are.
Save and invest at least 50% of your income. Put this in VTSAX or one of the other options we’ve discussed in this book.
Fund any 401(k)-type employer tax-advantaged plan you are offered.
Fund your Roth IRA when your earnings and the income taxes on them are low.
Fund your Traditional IRA once your earnings and the income taxes on them begin to rise.
Do this for the next ten years or so and you’ll be well on your way to financial independence.
Save more than 50% and you’ll get there sooner. Save less and it will take a bit longer.
If you get lucky with the market you’ll get there sooner. If not, it will take a bit longer.
During this accumulation phase, celebrate market drops. While you are in the wealth accumulation phase, these are gifts. Each dollar you invest will buy you more shares.
But never fall prey to thinking you (or anyone else) can anticipate or time these drops.
Sometime in your early to mid-thirties (or 10-15 years after you start) two things will happen: Your career will be hitting its strongest surge and you will be closing in on financial independence.
Once 4% of your assets can cover your expenses, consider yourself financially independent.
Put another way, financial independence = 25x your annual expenses.
That is, if you are living on $20,000 you have reached financial independence with $500,000 invested.
If, like our friend Mike Tyson used to, you are living on $400,000 a month/$4.8 million a year, you’re going to need $120 million.
As you can see, being financially independent is every bit as much about controlling your needs as it is about building your assets.
Once you are financially independent, begin living on your investments.
At the point you become financially independent, you can decide if you are still having fun and want to continue your career or try something new.
If you keep working, invest 100% of your earnings. You are living on your investments now. This will dramatically accelerate the growth of your assets.
Note: You don’t have to implement these last three points literally. Rather, this is a way to think about your assets and income. Most likely, in executing this concept you will want to spend from your earned income while keeping your investments intact and adding to them.
This growth of your assets will, in turn, accelerate the growth of the spendable dollar amount 4% represents.
As long as you are working, VTSAX can serve all your investing needs. The money you add along the way will smooth the ride.
Once you decide you are done working, diversify into bonds. The more bonds you add, the smoother the ride but the lower the growth.
Once you’ve reached financial independence and are able to live on 4% of your holdings, should you so choose, now is the time:
To begin expanding your lifestyle. Just be sure to keep your spending level at 4% of your holdings.
To think about giving like a billionaire as we discussed in Chapter 32.
To have children, if you plan to. You are still plenty young enough, financially secure and with financial independence you can arrange your affairs in such a fashion as to give them the time they deserve.
To consider buying a house, if you are so inclined. But don’t be in a hurry. Houses are not investments, they are expensive indulgences. Buy one only when you can easily afford it and if it provides the lifestyle change you want.
You’re young, smart, healthy and tough. By your thirties you’ll have F- You Money and you should have a blast getting there. Once you’ve got it, it will continue to expand, as will your personal options. Your future is so bright it hurts my eyes to look at it.
That’s what I have told and will continue to tell my daughter.
So, if you are also in college or a few years out and wanted to know what your kindly old Uncle Jim suggests, there you have it. Like everything we’ve discussed, it is all about expanding your opportunities in life.
If you are a bit more seasoned, don’t despair. It’s never too late. It took me decades to figure this stuff out. Like mine, your road has likely already had more bumps than those who follow this path from the start will endure.
But those bumps are in the past. It is your future that matters and that starts, for all of us, right now.