A lot of people tell me that it isn’t possibly for them to achieve financial independence because they don’t make enough money. While it’s true that if you made more money and saved more you could achieve this state faster. It doesn’t mean that you can’t achieve it at all. I’ve come up with a good representation of why you don’t need to make an above average amount of money to retire early.
Someone who makes $100,000 before tax will end up with roughly $78,928.75 after tax. Someone who makes $60,000 before tax will end up with roughly $49,206.50 after tax. We’ll call it $79,000 and $49,000 to make it simpler. So even though it is a $40,000 difference in income it ends up being $30,000 after tax. A significant amount of money? Absolutely. But it’s what you do with this money that’s important.
Marginal Tax Rates
It’s important to understand how to arrive at the $78,928.75 and $49,206.50 numbers. There’s a common misconception when it comes to tax brackets. A lot of people think that if they cross into the next tax bracket by even just $1 their entire income will be taxed at the new higher percentage. This isn’t the case. Just the amount earned into the next bracket will be tax at the increased rate. For example, we’ll call the top of the 15% bracket $37,000 (it’s actually $37,450). And we’ll assume for this example that this person made $37,000 last year and they made $37,001 this year. They will be taxed exactly the same on the $37,000 and just the extra one dollar will be taxed at the higher rate (25%).
There are two types of people
If the person who makes $79,000 per year saves just 10% of his income he’ll be saving $7,900 per year. If the person who makes $49,000 per year saves 20% of his income he’ll be saving $9,800 per year. So the person who makes $30,000 less per year is saving almost $2,000 more. It’s not always about what you have but rather how you utilize the things you do have.
As you can see it’s not necessarily how much money you make it’s more so what you do with your money and how much you’re able to save. It comes back to cutting expenses and managing your money. Though you may make less than someone else, you can make your money do more.
What Kind of Person Are You?
Are you the kind of person that constantly makes excuses for why you can’t make it work? Or are you the kind of person who will do whatever it takes to achieve your dreams? Honestly ask yourself these questions and maybe you’ll find that you are actually able to save some more money. Maybe you will be able to retire earlier than you thought. Take your finances into your own hands because no one is going to do it for you!
What percentage of your income are you saving?