I had this question several years ago during my investment journey and read and discussed a lot about this topic to find some answers along the way.
You can read about different opinions and numbers in books, social media, from other investors, and on forums about people saying you need $1mil, $3mil, $5mil, or $10mil+? There is no common ground.
The answer in my opinion is….it depends on your lifestyle. Everyone’s situation is different, there is no one-size-fits-all response.
What are some of the options to gather a sum of money you want to invest with?
You have won the genetic lottery and born in a wealthy family that gives you a generous sum of money. Good for you! However, this might not be the case for most people aspiring to this goal.
Win the lottery…what are the odds? Plus you probably understand the value of money if you read this post and are investing your money instead of “wasting it” on lottery tickets.
Start and build a successful business and sell it.
Join a startup that gives you stock options and maybe the stock will appreciate with business execution.
The most common option is to have a career working for an employer, save your money diligently and invest to eventually have enough money.
Develop side hustles to generate other sources of income.
What does one of the greatest investors of all time have to say about saving money?
“Do not save what is left after spending; instead spend what is left after saving.” Warren Buffett.
What about “real life” people?
The people I meet along my journey that were trading/investing full time all had this personality trait in common: “frugality”
frugal per Dictionnary.com
[ froo-guhl ] adjective
economical in use or expenditure; prudently saving or sparing; not wasteful
All around you during your daily life, you hear people all the time that can’t save a penny each month living paycheck to paycheck saying "You gotta live for the day” or “Life is too short” and making excuses not to save. Yet, they drive a brand new car every year, have a bigger house than they need, take many vacations abroad, always have brand new clothes each week, or always buy the latest and greatest gadgets. It only means saving is not their priority to fulfill their life or don’t see the point in delaying gratification.
A high income doesn’t mean wealth. What happens when you spend all your income? You got nothing left-right. Wealth is what you are able to save and accumulate that will snowball over time.
My view on saving money is that it is not about making life sacrifices but choices where you allocate your money to enjoy your life. It is just a question of perception of how you look at it. If you want a brand new car every year because this makes you happy and can still save money, why not? The goal is not to deprive yourself.
You need to understand that money is about gaining back your time. Money buys time and saving money will help you to get closer to this goal. This is a mindset that you need to acquire if you don’t have this thinking yet or develop further if you want to succeed in my opinion.
OK, I get it…but how much money do I need to save?
Financial Independence Retire Early “FIRE” or Financial Freedom
Let’s talk about the FIRE movement which I think is a good framework to help us assess how much money one would need. You are probably rolling your eyes thinking about how I am gonna tell you to cut your 5$ latte addiction to save money. My “alias” is “Maxwell House” so yes I do enjoy coffee quite a bit. It is not by cutting 5$ latte that I was able to reach this goal. Believe me, I did splurge in coffee shops along the way and still do.
The concept is basically to save as much money as possible from your income in order to accumulate enough money to quit the “Rat Race”, the 9 to 5 corporate grind so to speak, and live off the interests of your investments to do whatever you feel like. It did resonate with me. It is kind of advancing your retirement a few years to gain financial freedom and do whatever is important.
The “branded” FIRE concept originated in 1992 with the book Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence by Vicki Robin and Joe Dominguez
The movement gained a lot of traction in the last few years with social media, especially with Mr. Money Mustache's blog which has excellent articles to help along your journey and many case studies on his forum.
This concept is not new in itself and been used by many people during our history to accumulate wealth.
What is important to understand from the FIRE movement that makes sense for a full-time investor?
Typically, instead of saving ~10-15% of your income for retirement like a financial planner would recommend you would save aggressively 40-50%+ of your income. If you would have a saving rate of 50% of your income at a theoretical ~10% return (the S&P500 index has returned a historic annualized average return), you would be able to retire in around 13 years by withdrawing 4% of your pot. This is called the 4% withdrawal rule. To know how much money that represents based on your annual expenses, you can revert the math and it would be 25x expenses.
As an example, if your annual expenses are $50,000 a year you will need a pot of $1,250,000 (25 x $50,000) to live on the 4% return and “theoretically” never run out of money.
You can play with the parameters and establish how much time you would reach your goal based on your annual expenses and saving rate/amount with the When can I retire? Calculator by Networthify
Will my money last forever?
You can also calculate the success rate of your portfolio based on different market cycles to do some backtesting with this tool FIRECalc®: How long will your money last?
Again with our example of annual expenses of $50,000 and a fund of $1,250,000 here are the results:
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%.
You can play with the numbers and do different scenarios. You want to change the 4% withdrawal rule as you don’t think it is viable for you, try with 3.5% or 3% or more if you think you will complement your fund with other sources of income. If you reduce your withdrawal rate to less than 4% it would mean you would need higher than 25x your annual expenses.
By playing with different scenarios, I figured this would provide me with a safety net and be able to invest full-time and had a plan. I would need to maintain a CAGR (Compound annual growth rate ) of 4% theoretically in order not to run out of money.
How can you save 50% of your income?
Increase your income, keep your expenses low, and save the difference. Simple right?
50% is really aggressive. You could start with 10% and increase gradually year after year to start with. The numbers are not fixed, you make your own rules.
You could increase your income year after year with promotions, taking extra courses, certifications, changing companies, etc…You can also work on cutting your expenses year after year. Without increasing too much your lifestyle and avoiding keeping up with the Joneses you could save the difference. If you can do both each year, you get a double whammy effect and will be able to increase your saving rate.
Control your major expenses known as “The Big Three”
What does that mean? You will need to do a budget if you don’t already have one. Here are the major family expenses that play a huge role in your budget.
Housing cost: This represents close to ~%40 of a family budget. Mortage VS rent, family with kids or no, size of the house/apartment, location plays a big role and are all questions you need to ask yourself if you can reduce your housing cost.
Transportation cost: We probably used our car 5% of the time during a year. Now with covid and work from home, it is probably what 1%? Can you or your family own only 1 car instead of 2 or no cars at all if you live in a metropolitan city? Can you carpool to work? Walk? Bike?
Food cost: Calculate your food cost and it is a major expense. How can you reduce your monthly expense? Buy in bulk? Online groceries? Restaurants are an easy target. Brown bag your lunch and reduce your lunch out at restaurants with coworkers. Yes, funny enough in my experience the coworkers complaining they never have money are out for lunch 4-5 days a week to restaurants.
What worked for me?
Here is a little background. I have always been working since I was 15 years old and started during high school at a grocery store. I started to pay for my discretionary items and had to pay for my college education and was saving a bit of money in GIC. I got a scholarship in college and used that scholarship to buy a brand new $2500 mountain bike at the time.
Did I get into debt at some point in my life? Yes. When I got my first full-time job out of college at 19 years old, the first thing I did was to buy a brand new car. I had this idea at the time that wealth = high income, brand new car, etc… I used all the money I had saved in GIC as a downpayment on the car. A brand new car cost a fortune in insurance for a 19 year old guy. I was living in an apartment that cost me $435 a month and had only a bed, an old sofa, bookshelf, my mountain bike next to my bed, no decorations, and a bedsheet in my window. I didn’t need much and was content, independent, and living the dream …or I thought I was. I then had to borrow $3000 the next year from my parents because I had a few debts, run out of money, and could not pay for my car payments to get to work. My parents made me feel bad enough about it because I wanted to be independent and told me to take responsibility. I got out of debt the year after and repaid the $3000 to my parents. I never wanted to be in a position to owe money again to someone else.
Budget: An Excel spreadsheet is your good friend. I never track penny by penny but by categories and always done it this way. I do a good review yearly or twice a year and don’t go crazy on the month to month. We just know our fixed costs and variable costs (credit card). We have a set maximum we can spend monthly. Do we go over sometimes? Yes, this is called life.
Career: While working, I invested in stocks mutual funds and made sure I got the employer match. I was working full-time while studying at University at night. Bonus point, I got my employers to pay for my University based on certain grades. In Canada, businesses have 1% they need to reinvest in employee education and training. Use this to your advantage to propel your career. I learned to understand my market value, compared elsewhere, and renegotiated my salary each year. I enjoyed my career, learned a lot of skills, asked a lot of questions, studied more, got certifications and training to bring value to my teammates and employers. When I hit a wall or was not seeing any opportunities for promotion with an employer I would pursue another challenge with another employer. I averaged around ~5 years per employer in my life and worked for around 16 years for an employer during my career excluding my students’ jobs for another 5 years.
Housing: We bought our first and only house so far when I was 31 years old with a good downpayment. Before that in my twenties, I lived in reasonably priced apartments and also lived with roommates, because most of the time I was just home during the week to work. On the weekends, I was out of town to see family and friends and traveling to go biking. This is where my fun money was allocated. I was also saving and investing a sustainable amount of the difference between renting an apartment or a room at the time than owning a house/condo. A lot of my friends when they started their full-time career bought a condo or house right away and couldn’t save as much. With the real estate market in certain areas and especially now with covid, you have to do calculation and comparison to see what make sense for you.
Transportation: We run our car to the ground. Yes, our family drives two 10-year-old cars that work just fine and we do the maintenance and repairs when needed. (We know we will soon need to replace one or both, however.) The amount of money you save there is ridiculous and I am not talking about insurance. I estimated we save ~$5000 per car a year and insurance VS a brand new car.
Food: When I was younger I was not that great in that category and enjoyed going out to restaurants with friends on the weekends BUT I was mostly brown-bagging my lunch at work during the week which helped. Our family now does now online groceries. We calculated that we save on average around ~200$ a month this way and it is a huge time saving for us. Do we splurge on food and alcohol on weekends when we host people? Yes. The goal again is not to deprive ourselves.
Discretionary: My bikes are now bought mostly used. I own 3 different types of bikes…Yes that is part of my fun money and one of my passion.
Telecom: I had cell phones provided by employers so that was a good saving. Now we have a $25 monthly cell phone plan with 1GO of data and a Canada-wide plan with a low-cost carrier and a low-cost internet provider instead of the major carriers in Canada. A Netflix subscription and no cable. I use this approach since my early twenties and estimated I was saving about ~100-150$ a month.
Travel: I did a lot of travel younger to go skiing or biking with friends out West. Our family also loves to travel. When we had our child we deceived to travel out West again and do a road trip for 5 weeks. I used a lot of points/air miles to travel. There were some juicy credit card sign-on bonuses, I would spend the minimum on it cancel, and re-apply later. Wash/rinse and repeat. It is a pain? You decide, but I got 6 free flights this way. It helps to cut down the cost of the vacation. This is a priority for us in our lives and will always allocate money there in our budget.
Buy used: Facebook Marketplace, etc…Hands down from family and friends especially for kids that grow so fast helps quite a bit. We still have lots of furniture from when we lived in apartments.
Negotiate everything: Each year, we renegotiate our car and house insurance. We reevaluate our cell phone and internet plan if there is a better alternative. Learn to negotiate, make some calls it is worth it when you are trying to accumulate more money. I try to reduce as much the increase that service providers try to pass once you are locked in as a customer. I did not hesitate to switch service providers when I get a substantial saving.
Investing: I don’t have a background in finance but learned the hard way to invest. I started with mutual funds, then ETF, and then on individual stocks. I tried a different approach and paid an MBA to the market a.k.a. I lost quite a bit of money, made mistakes, and will still lose money on some investments and make more mistakes in the future but I try to always improve my process. The first few years were hard but this is something I really wanted to improve and worked hard to pursue. I read lots of books, articles, a lot of FinTwit, ask lots of questions, and had a lot of people to thank during the years that I learned from that also helped me. If you can generate a return higher than the S&P500 index you will reach your goal faster.
Once I got the ball rolling in all aspects mentioned, it became a habit year after year and improved a little each year.
The FIRE concept for me made perfect sense and my personal goal was not to retire but to focus on my health, spend more time with my family, and spend more time on my investments. Investing was starting to take a lot of time and had a hard time balancing a career not related to investments, investing on the side, spending time with my family and my health took a toll (that is another topic). My portfolio grew and could comfortably withdraw 4% a year to pay for my salary. I figured I would give it a shot and FIREd. I worked overall 20 years including students’ jobs and a career to reach this goal.
I strongly suggest like anything in life to read more about FIRE if it is an approach that appeals to you and seek advice from people who did what you are trying to accomplish. Go ask questions to other full-time traders/investors about what their strategies are and how they manage their “lifestyle” risk so to speak. You don’t have to just manage your portfolio risk as a full-time investor, your annual expenses are not to be neglected.
The strategy I took and describe here is what works for me and this might not work for you. Of course, everyone has a different comfort level and risk management with their money.
If you aspire to be a full-time investor one day, it is now time for you to establish a plan if you don’t already have one and just start to save a percentage of your income each pay to get the ball rolling and slowly increasing that percentage.
What will be your strategy?
Some useful resources:
Some books that help me along the years to develop the right mindset to help accumulate money and FIRE.
And Mr. Money Mustache's blog
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