By Dr. Harry Hamann (MBA), August 23, 2022

Financial Freedom realistic?
Invest Systematically.

Is it realistic to aim for financial freedom? Let us assume a person has a monthly income of $2,292 (US average: $2,957), living cost of $1,555 and a tax-rate of 45%. What is available for saving and investing? After living cost and tax, this person could save or invest $777 per month. Does not sound like that much. Can this "average" person reach financial freedom or is it totally unrealistic?

Let's pick person A (Poor Dad). He is conservative and is keeping his savings at the local bank. It feels safe. He is confident that he save up a nice amount for retirement. How much would he have saved up after 30 years? $265,320. After adjusting for inflation, the real purchasing power of that sum of money isn't that much anymore. Is the strategy of Poor Dad sound? It depends. Saving is better than not saving, but: is there something better than saving cash in a bank?


Let's look now at person B (Rich Dad). Let us assume he has the exact same income, living cost and tax-rate. He also could save or invest $777 per month. Rich Dad does not trust banks and thinks cash in the bank is getting devalued by central banks increasing the money supply. Rich Dad invests his money in the US stock market and buys the SPY (S&P500 Index ETF) every month for $777. Let us assume the average return of his investment is 8%.

Compared to Poor Dad ($265,320), how much money has Rich Dad after 30 years of Investing Systematically? $1,082,031. Rich Dad has over 4 times more retirement money compared to Poor Dad. Sure, you would have to adjust this number also for inflation (and capital gains tax, and ETF costs) but the point is: it still is a substantial amount of money that you can easily retire on comfortably.

What if Rich Dad get's a little bit of help from investors with proven outperformance? Does it still take 30 years to reach $1M of retirement capital or can this time be shortened? The graph below in the bottom right corner shows the number of years it takes to reach $1M of capital with different rates of annual return (CAGR: compounded annual growth rate). Let us say instead of 8%, Rich Dad is getting now 15%. The number of years it takes to reach $1M is dramatically reduced to less than 20 years. What if Rich Dad can achieve 30-40% return for at least a couple of years? You are now closer to 10 years.

Investing performance dramatically affects capital growth. Assumptions around income, expenses and tax-rate do as well.

What is your income, how high are your expenses and your tax-rate? How much can you invest? What would happen to your wealth if you would invest systematically?

Do this exercise! It will pay off (literally).

Lessons:

  • Investing is powerful. See the difference with and without investing?
  • Invest systematically every month.
  • Gain Know-How to increase returns (e.g. here)

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I hope this was helpful to you. Until next time.

Best,
Harry


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