A lot of people claim that it isn’t possible 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 representation to illustrate this point.
Jack, who makes $100,000 before tax will end up with roughly $81,710.50 after paying federal income tax. Jill, who makes $50,000 before tax will end up with roughly $43,060.50 after paying federal income tax. So even though it is a $50,000 difference in income it ends up being a difference of $38,650 after tax. A significant amount of money? Absolutely. But it’s what you do with this money that’s important. (This example only includes federal tax to simplify things). Marginal Tax Bracket
It’s important to understand how to arrive at the $81,710.50 and $43,060.50 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 this example we’ll assume that this person is a single filer and made $38,701 this year. The top of the 12% tax bracket is $38,700. They will be taxed $4,453.50 for the $38,700 and then they will pay 22% on anything above $38,700 up to $82,500. So they will pay 22% on the $1.00 amounting to $0.22 for a total of $4453.72. I a link to all the brackets for 2018.
Be More Like Jill
If Jack who nets $81,710.50 per year saves just 10% of his income he’ll be saving $8,171.05 per year. If he invested this money for 10 years and earned a 6% return this would grow to $128,796.10. Not bad!
If Jill who nets $43,060.50 per year saves 50% of her income she’ll be saving $21,530.25 per year. If she invested this money for 10 years and earned a 6% return this would grow to $339,370.36. This is 163% more than Jack would have after 10 years! That’s pretty impressive. I know a lot of people think saving 50% of their income isn’t possible (it absolutely is), but here’s another less dramatic example. If Jill saved half of that, just 25% of her income she would be saving $10,765.13 per year. After 10 years at 6% that would grow to $169,685.26. This is still almost 32% more than Jack would have after 10 years.
What Do You Find Value In?
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.
You just have to be a little bit smarter than the average person in regards to spending and saving money. Spend money on the things that truly make you happy. Does fast food everyday truly add happiness and value to your life? It probably does the opposite, especially considering the negative health side effects. Take a hard look at where you’re spending money and evaluate how much value your purchases are bringing you. To me, financial independence is best way to spend your money. It may takes 10, 15 or even 20 years to achieve it, but in the end you will have purchased the most powerful asset, time. Time to do the things that do bring you value and happiness. Like spending time with your family or quitting your job and pursuing your passion, even if it doesn’t pay well or even at all.
What percentage of your income are you saving?