He was 22 years old. Working his first finance job. Making $40,000 a year. Living in Manhattan. Not Manhattan, Kansas, either. The Big Apple, where financial fortunes are made, and paychecks are squandered. There’s no place that will suck the life out of your budget quite like New York City.
But Sam Dogen of the Financial Samurai blog is living proof. You can earn a modest salary, pay your bills in America’s most expensive city, often assuming you’ll share housing costs with roommates and — here’s the kicker — max out your 401(k) contributions.
“I realized after two weeks on the job I couldn’t last working such long hours for decades,” he explained. “I logically decided to save as much money as possible to give my future self options.”
This was in 1999 dollars, mind you, so it’s more or less the equivalent of making $52,000 a year nowadays. Back then, 401(k) contributions were maxed at $10,500.
Anyway, here’s how he pulled it off:
His math at the time told him, if he could grind it out for 10 years, he would have, assuming a 7% rate of return, $150,000 saved by the time he turned 32. At that point, he would have options.
“Even though my budget looks pretty boring and maybe even a little sad, I was simply too busy at work to spend money on anything else,” Dogen said. “To pay up for a nice apartment felt stupid because I was hardly there. To go clubbing or get bottle service at a fancy lounge with my fellow analysts would only limit my options in the future.”
Not everybody is willing to share a studio apartment, to use time off for staycation and has a company that pays for food, but Dogen offer some tips anybody looking to reach financial independence at a young age could use.
1) Live in a crap box — Do you really need a large spread to be happy? Can you not be comfortable in smaller, shared spaces? “There is no reason why you shouldn’t continue living like a college student until you can save at least 30% of your income, if not 50% of your income,” Dogen says.
2) Work so much you don’t have time to spend money — Nose to the grindstone.That’s what your competition in other countries is doing, Dogen says. He added that “there is so much to soak in that if you’re working 40 hours a week or less before the age of 40, you’re leaving a lot on the table.”
3) Don’t confuse yourself with someone else — “If you only work 40 hours a week, how can you compare your salary to someone working 60 hours a week? If you are 30 years old, how can you compare your net worth to someone who is 45 years old? If you dropped out of college, it’s not rational to compare yourself to someone with a graduate degree.” You get the idea. Set realistic targets for yourself and don’t get all FOMO-y.
4) Max out all pre-tax retirement accounts — This. A thousand times THIS. So many people don’t take this simple step because it seems daunting. “You will adjust to your lower gross income because you will find a way to make things work,” Dogen rightly says. “If you max out your 401(k), then you’ll always know that you’re building at least that much for your retirement. In 10 years, I promise you will be happy you did.”
5) Ask yourself what’s wrong with making more — Basically, make sure you’re valued appropriately by your boss. “Unless you are a terrible employee with low self-esteem…, your earnings trajectory should be up and to the right along with inflation,” Dogen says. “You don’t expect the stock market or the real estate market to stay the same price forever do you? Neither should you expect your salary to stay stagnant with more experience and expertise.”
Dogen has learned through living it. He “retired” at age 34 with about $2 million in after-tax investments producing about $80,000 in passive income. Thanks to the bull market and the success of his blog, he’s now a member of the FIRE movement — financial independence, retire early.
Of course, by the looks of how the stock market is behaving these days, that path looks a bit more sketchy. In midday trading on Monday, the Dow Jones Industrial Average
was off more than 500 points.
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