My friends and I are getting rich. Not so much “rich” in an objective sense, but from the friends I talk to, it seems like our net worths are growing a little faster than our incomes. When we started our financial journeys we were doubling our net worth every year or so. $15,000 of annual savings means you go from $10,000 to $25,000 to $40,000 to $55,000. But now, 5.5x in 3 years doesn’t happen any more. Even if you’re saving $30,000 (doubling that initial savings rate), that $30,000 increase on a $300,000 net worth translates into growth of just 10% on your portfolio. In fact, it roughly matches the 10% return you might expect from stocks, such that your savings rate is now equal in importance with the performance of your investments.
This marks an interesting inflection point, and we’re trying to figure out what it means. One implication is that we don’t see quite the same rewards for our frugality as we once did. In the beginning, squeezing out an extra $1000 of savings meant that our fortunes would grow 6.67% faster, which is actually a lot. But now, an extra $1000 means the overall portfolio grows only 3.33% faster. The impact is half as big.
The second implication has to do with enjoying life. In contrast to 10 years ago, an extra $1000 saved today means a lot less in terms of added security and freedom, and slightly more in terms of experience. We feel older, more established, and more aware of what moves the needle for us when it comes to life satisfaction. In fact, I think we’ve each accumulated a small list of financial regrets where we wish we had spent the extra $200 here or there to make our experience more memorable. More important than that, however, is the growing sense of our own mortality. Sure, 30-something is really young. But it’s not 20-something. We don’t have quite so much unlimited life ahead of us as we once did.
Third, we don’t have enough to retire today. And we might not for quite some time. For those of us who want kids, that added expense pushes retirement back until our kids are in high school. That’s what, 15-20 years away? Odd how so many of us wanted to retire by 40, which was at one time, 15-20 years away. Even if we were to save frantically starting today, as I discussed above, that approach produces diminishing returns and is perhaps anathema to an elegant life plan.
Fourth, we don’t really know what the future may hold. We are still living and learning about who we are. The older I get, the more I want a boat to take people tubing and wakeboarding on. It seemed like such an obscene, dismissible luxury when I was in my 20s, but now, I can think of few moments when I’ve been happier than when piloting a boat. I might need to build that into my financial plan. Or, I might have kids. I might want more kids than I think. I might want a nicer house in a nicer school district than I think. Who knows what the future has in store for me? I might end up accustomed to (and thoroughly enjoying) a much more expensive lifestyle in 20 years than I have today. In fact, it would be depressing if I didn’t. Probably, life will get more expensive for me, one way or another.
All of this is to say, we’re re-writing our financial plans in real time, aiming for greater balance. We don’t want to be as frugal as we were in the past, nor do we want to cash out all our savings today and go on a spree. Everyone’s decisions will vary, but here’s where I’ve landed for myself:
- Save 15% a year for retirement. That might be a little high given the ultra-frugality of the past decades, but it is conservative enough that I have basically no worries about my own retirement with this number.
- No debt outside the mortgage. Save for big purchases in a taxable brokerage or high interest savings account. Just these first two things wipe out most of the possibilities for “financial disaster.”
- Make small extra payments on the mortgage. The idea isn’t so much to live in this particular house, paid-off, forever, as to have more money to buy a bigger house later on when kids enter the picture. Again, aim for no debt.
- Force myself to take 2 trips per year, preferably abroad. I get so much out of traveling, more and different from what I expect at the start of a trip. I’ve never missed the money that I’ve spent on travel. But again, I travel pretty frugally.
- Keep investments in stocks to beat inflation.
- Do good work that I enjoy. I have the option today to turn down bad clients, and I do so. Mostly, this just means I don’t with people I don’t like. This is a tremendous luxury. And actually, I really love my work. If you want to hold my attention, just talk to me about money and life.