Saving Saving Saving

Financial Independence…

And if we are all wrong?

Like who was saying that the earth was flat?

Let’s see the life of our best friend Joe…

Enter Joe

• Fresh Graduated with BSEE
• 25 years old in 2025
• Engineer employed in a software company
• Living in Colorado
• Single
• First paycheck including bonus before tax $75,000

January 01 2025

Joe was lucky…his parents paid for his college in a middle end university and for his used car (now ten years old).

John is very happy with his salary…a lot of money…
HR mentioned him about something called 401K and the importance of contribute to it…the company match..and the fact he is supposed not to touch it before 60 years….

Naaaahh this 401K is really complicated and looks useless and risky…then touching the money only when I will be 60 years old and very likely dead…? No Way!

So Joe starts his single life…

House $2,000/mo

Mhhh…the new apartments downtown Denver look very nice…$2,000 maybe a little expensive but…hey they are walking distance from all the cool bar an d restaurants of the area and you know I don’t want to move to a single family in the suburbs..I will do when I will be 40 years old and with two kids!

Bills (Electricity, Gas, Water, Misc)  $150/mo

Joe is seldom at  home, but when he’s there he wants to forget how cold is Colorado…!!! Luckily apart of electric bills he doesn’t spend much more on other utilities.

Car $1,000/mo

The 2015 Nissan look very old and crappy. I cannot leave in this suburb with this car and go out for a date with it…

Since now Joe is working credit is easy…so…what’s best than buying a new car especially now that there is a fantastic offer in the BWM dealer?

Put some gas, parking and Insurance…roughly $1,000/mo…no bad right?

Eating out $1,800/mo

Joe never cooked at home and his parents never thought him.

Anyhow there are so many restaurants downstairs for a quick dinner, Starbucks for breakfast and a great selection of salad bars around the office for a healthy lunch!
12$ Breakfast 18$ Lunch 30$ Dinner…not so bad!

Food Groceries $500/mo

Joe has no time and he doesn’t cook so he doesn’t need much food.
The upscale groceries store is just walking distance from his apartment
and hey..so many organic products!!!
500$/mo in so healthy products (too bad so many are thrown away because Joe is too busy and he forgets the expiration date)

Gym $99/mo

Mhhhh all that food and 8 hours sitting in front of the computer is manifesting big time on Joe belly…time to Gym..!
There is a cool Gym downtown…the price…a steal…all you can go open 24h and with swimming pool only $99/mo…!

TV – Internet $150/mo

When Joe come back he needs some relax..so what better than a 80″ 4K TV (5000K$) with a nice Internet + TV Cable + Netflix package for only $150/mo?

Mobile $70/mo

Joe has many friends right? So the unlimited data package at $70/mo is a must for his video call and social network…hey there are more expensive one…you know?

Furniture $30,000 (one time)

Having lived with his parents Joe doesn’t own practically anything…
and he has a 1200 square feet to fill now..!

Surely he doesn’t want cheap IKEA furniture in his posh apartment…besides he just discovered that in Boulder downtown there is a cool and trendy furniture store that import directly from Italy.
Wow…he has practically to buy everything…total expense $30,000…but it’s one in a lifetime!

Social Live $2,000/mo

Denver it’s so cool….! He cannot resist his clubbing, bar hopping and restaurant before Thursday (sometimes even on Wednesday)…
$500/week…well spent!

Clothes  $150/mo

I really cannot go to work and in the club with the Ninja T-shirt I was using in the college…I need to dress like a young professional man now…Time to invest in my look!

 

Vacation $250/mo

Being a software engineer at XWZ tech Inc is very stressing!

Joe really needs to take a break from the cold of Colorado during his weeks off.. what’s better than hopping on a plane to Mexico or Hawaii…? $3000 really well spent!

Outdoor life Sky $1000 (one time)

Joe live in Colorado…he must learn how to sky…!
And so many people in the office go….
Here he’s with a brand new unlimited seasonal pass for only $999 (it was $1200…what a deal!)

 

Outdoor life Golf $50/mo

Well…with so many sunny days, great golf courses and many Managers and Directors playing in the company  Joe must play golf during summer…poor Joe…with all the hours spent in the cubicle he really needs some fresh air

Health Care/Insurance  $200/mo

Joe’s workplace offers a great Health Care package with only $150/mo from Joe pockets. Add a couple of visits for cold and small stuff (Joe is so young!) and the total cost is very limited.

The first year is gone…what a year!

Let’s crunch some numbers

2025-2030

Joe had great 5 years as single guy in Denver.
The job was doing great…now he finally reached the six-figure milestone!
He also found a nice girlfriend and got engaged…thus the sweet single life is getting to an end soon.
Expenses wise he’s still doing the same life…just cutting off golf (too boring) and social life since he found a stable partner.

401K..? What’s that again…?

Let’s see where he is …

 

The good news is that Joe parents gave Joe (only child) their second home and he sold it for $250K thus so far no need of credit card debts.

Life is great for Joe!

2030-2040

Joe gets married and two kids enlighten his family life!

Joe also get promoted as Director of Engineering in a new high-tech company close to Boulder and his salary and benefits dramatically increased.
Also the health care expenses increased with two kids in the family.
Kids also added day care expenses to the balance even though Joe’s wife is not working.
And of course a bigger family requires…a bigger house and cars ! (and vacation budget).
Luckily the social life expenses almost dropped to zero….

Here we are…

Here it is Joe at 40 years old with some money in his bank….almost  $25K…!

Joe feels almost rich with that amount available…now he can afford that vacation in Europe with the new 100″ TV or why not a boat or a new car.

$25K are a lot of money…isn’t ? Especially when almost of his peers are into deep debts…!

Of course Joe doesn’t want to hear about investing…he knows people talk a lot about Dow Jones, S&P, mutual funds…too complicated and surely a scam.
In any case Joe already made a great investment with the house…is not real estate the best investment around?

2040-2050

Kids are growing.. both are in High School now.

Joe got another promotion as Vice President of Engineer in a start up….those are the peak years of making money.

 

 

He’s happy because when he turns 50 years old he reaches 45K$ in saving (all of them in his checking account since he’s still not trusting the traps of investing!)

Also all expenses increased: Food (two big boys are always hungry!), Health care, Mortgage, Property Tax, Car Payments, Bills, Clothes etc but likely Joe is making great money…so no problems!

2050-2055

College years for the kids…both in an affordable one so the expenses are limited to $4K/mo per kid…all included (no bad right?).

Health care expenses are going up…Joe and his wife are both in their 50 and co-payments and dentists expenses increased and the kids are still on their insurances plan.

Joe started again with golf thinking about retirement…

Economically the situation started deteriorating…not only Joe spent all the saving but now he has almost  $400K debts at 7% average in college loans and on a couple of credit card.

 

 

2055-2060

Joe and wife don’t think downsizing from a big house (now empty since the kids left) and luxurious European care is a wise move.

After all they are affluent middle class right?

Joe was caught in a sudden  layoff due to economical crisis and, as usual, the highest paid are the first to go.

He stay almost one year out of workforce and he found a job as Manager R&D with a substantial pay cut.

Luckily the kids are practically out of college and all almost all the expenses of Health care are for him and his wife.

Unfortunately their expensive lifestyle is costing more than Joe salary…roughly $50K are going into credit card debts per year to compensate the expenses.

It will go better now with kids out of college!

 

2060-2065

Joe job is stable and kids finally are paying some of the college loan back.

Great news…no more mortgage and Joe finally decided to buy a slightly less expensive car.

All the other expenses are going down as well apart the health care since they both went under a couple of surgeries and therapies.

They were able to save more than $100K in five years…not enough to finish to pay the debts…

 

2065-2070

Joe retired.

Between Social Security and Companies pensions is bringing home $50K before taxes.

As we know Joe never believed in investing or 401K so the $50K before taxes is all they have.

Kids kept giving the money back for the students loans but in 2070 they repaid  everything and now they have their own family to take care of.

Joe and wife are roughly more than half million dollars in debts.

 

2070… and the future

So what now…?

Joe and his wife now are forced to downsize the house and giving up the expensive cars.

Doing so they are able to reduce their debt to $300K in 2072.

Too big anyhow the debt (at 12.5% interest on 5 different credit cards and one home equity)  to be repaid.

Joe and wife will likely die poor in some hospice giving as gift the debts to the kids.

 

This is no fantasy

Every year thousands of people end up like Joe and his wife; despite making a great salary while young and having his parents paying his college.

Every years people cannot realize they are spending more than what they make and that they need to save money for the future.

This is no fantasy…this is the sad typical middle class life.

Don’t be one of them.

 

According to 2017 CareerBuilder study

Seventy-eight percent of full-time workers said they live paycheck to paycheck, up from 75 percent last year.

Overall, 71 percent of all U.S. workers said they’re now in debt, up from 68 percent a year ago, CareerBuilder said.

While 46 percent said their debt is manageable, 56 percent said they were in over their heads. About 56 percent also save $100 or less each month, according to CareerBuilder.

On this subject people, especially in the USA, discussed and are discussing ad nauseam.
But still people seems not getting the importance of it, or simply don’t care.

And this is happening in the richest and most developed economy of the world.

Why?

Mindset and Ignorance .

Let’s analyze, change them and get the first step towards Financial Independence.

Let’s start with mindset.

Mindset

Western society are based on capitalism that in the last 60-70y (let’s say after the end of WW2) degenerated in the concept of need of constant growth and increase of consumption to sustain the economy.
The concept of the constant growth is a pillar of modern economy.
Economy Growth as increase of the market value of goods and services.
Basically every company should grow in order to make more money, so increasing the market value of goods and paying taxes, the services of the Country where they operate.

The concept of strong economical growth at Country level is fundamental in emerging economies where it’s urgent to reduce poverty and build basic infrastructures such as roads and access to basic services like drinkable water, electricity and gas.

Conversely in developed Countries the continuous grow became a boomerang i.e. decreasing the quality of life of people for low/no returns.
That’s where we lost happiness to get almost nothing in change.

In a nutshell: being stuck three hours in traffic to work and contribute to economic growth in a third world emerging country might be worth if I am going to use such hard earned money to feed my kids, have clean water in the house or a roof under my head.

But (and this is a HUGE but) if I decided to be stuck in traffic in L.A. or San Jose mainly to pay the mortgage of my 4000 square feet (where I am not very often anyhow because I am always at work to pay the mortgage!) or the loan on my new cars or the latest cell phone, camera, luxury gadget etc. is very different.

We need to spend the money (as result of the growth) in something that improve our lives as total balance.

If, in a scale 0-10 (with 10 meaning  full satisfaction) working is reducing my lifestyle let’s say by 5 points but what I can buy with the earned money is increasing +8 (to feed my kids or having clean water in the house etc) the balance is positive. (-5 +8)

Conversely if a bigger mansion or the new “toys” give me back 2 o 3 point of quality life there is something wrong.

Let’s take the car for example

I had several discussions with friends making 1300-1500 USD (or Euros) per month on this subject.

I show them that, using  a conservative calculation,   an economic  car (purchase price, repairs, insurance, tax, gas excluded) costs at least  1000-1500USD or Euros PER YEAR.
This means that they work one full month ONLY to have a metal box with the wheels on the road that they use it….90% of the time to commute to a job!
So… I need the car to go to work and I  need to work to have the car…can you see something strange here?
You might think, there is no solution, I need to work and I need the car… are you really sure?
Did you consider all the options?
Like using public transportations? Moving your house closer to your job or …biking/using a cheap scooter to go to work?
Or, if really having the car is a must, what about to buy a cheap, low consumption and used one and keep it for ten or more years ?

We are so blinded by the mantra find a job, spend your money, pay your bills and die that we don’t even realize what we are doing.

Every penny spent needs some work to do in order to earn it and this work needs your time that you will not be able to spend with people or doing things you love.

Think about it, every time you spend money think in term of time needed to earn it, time staying with people you might hate, maybe your boss, your coworkers, your customers doing a dull and stressing job.

Our mindset should shift from “We work because everyone does it” to “We work in order to be happy”

Happy because our job is IMPROVING our life either like in the case of the person living in the developing countries or if working is satisfactory or if the money are good enough to aim to a quick financial independence.

Ignorance

People live paycheck by paycheck because they ignore there is another way of living.

Clear, simple and dramatic.

They make 10 and they think they are entitled to spend 10 (or 12 or more especially in the USA where paradoxically everyone should be very rich compare to other places in the world ).

The solution?  Financial Independence

The only  way out that is saving to reach Financial independence (FI) like we already discussed. 

The formula is very simple:

If

I spend each month $XXXX
I am able to generate revenues from passive investments (rental income, side job, dividends, blogs, etc) $YYYY

If $YYYY is ALWAYS equal or greater than $XXXX I am financially independent => I don’t need to work a single day in life anymore.

Everything boils down to three numbers:

1) How much I spend each year ($XXXX)
2) The net worth I have that generate the passive income ($YYYY)
3) The interest rate of the net worth that generates the passive income (Z%)

As said the FI is reached when

Expenses <= (Equal or less than) Passive income

Being

Passive income=Net Worth * Average interest generated by the net worth

We have:

Expenses <= (Equal or less than) Net Worth * Average interest generated by the net worth

Let’s make a practical example

Yearly Expenses=$24,000
Net Worth = $1,000,000

In this scenario we need a net interest of 2.4% ($24,000/$1,000,000 * 100) to cover the Yearly expenses
If our net worth is $2,000,000 we would need only a net interest of 1.2%.

Intuitively if we reduce our Yearly Expense to $20,000, we need a net interest of 2% ($24,000/$1,000,000 * 100) to cover the Yearly expenses
If our net worth is $2,000,000 we would need only a net interest of 1%.

Let’s examine some scenario

To  get $24,000 per year with 2% return we would need $1,200,000…with $5,000,000 saved we will net $100,000per year before tax…with $600,000 we can afford a $1000/mo lifestyle.

Let’s see what happen when we bump our saving rate to 3% – 5% – 7% – 10%.

 

 

 

Thus Making, Spending and Investment Return  is all what you need to know

 

1) Making

Making is the active action of making money i.e. you are doing some actions to generate that cash and if you stop doing it that cash flow disappear almost immediately.

Typically the sources are:

1) Your primary job (9-5pm or entrepreneur)
2) Side job (selling stuff, blogging with revenues, uber driving etc.)
3) Passive Income from Investments (dividends, royalties, real estate rents, peer2peer lending etc.)

Usually you know what’s the average income you can get from these activities, let’s forget for a while the possibility of inventing a great product that will skyrocket your income and let’s focus on your average income.

You know what you are making but maybe you are under evaluating how much you can increase your income.

Typically (unless you are already in a high expense area with well above average salary) you can double your income  simply changing job description and/or Country.

Yes double.

I know several people (me included) who doubled or tripled their salaries simply changing function or more commonly workplace.

But guess what…?

Not so many…why?

Because People are resistant to change

They prefer 40 years of paycheck to paycheck agony vs 10-15 years maybe far from home or in an unconformable job but with a solid income and reaching a financial independence.
Comfort and agony….if we add no tight expense control to equation you are doomed to 40 years of mediocre job and life.
You might be happy, sure, but honestly today I found that 90-95% of 9-5 people are complaining about their job, peers, boss etc. and their hobbies, vacation or family time is never enough to compensate the 80% of the time they spend for job related activities.

Being happy while you spend almost all of your low income is not the pathway to happiness…we know that…

So….what should we do?
Changing radically our job or location?

Yes (in case you missed it this was a big yes…)

Listen, if you are lucky maybe you don’t have to change location but it will be almost impossible to double your salary remaining in the same industry and region (unless you are enslaved in the actual one).
One alternative is to change industry and move to a better paid one. You might need to go back to school and get more skilled for that.
Or get skilled on making money on the internet flipping stuff or blogging or become an influencer in something
Whatever it is you need to take BOLD actions.

2) Spending

This is the easiest part, believe me.

I am already hearing you “come on man…I am already cutting corner everywhere…where can I find that extra $10!”
Are you sure?
Do this exercise for me.
Track every expense for a month (to the dollar, euro, rupia, yen, rmb…whatever else) and analyse it.
Are you still sure you cannot reduce eating out so often? Or using that car? or cancel the expensive subscription you never use? Or reducing wasting food?
Or not buying the thousands of expensive and useless gadget? Or in vacations?

Yes you can and you must to reach FI.

Reducing expenses is much important than revenues because it has a double effect:  for every dollar saved you reduce the money you need to reach the financial independence AND you can invest that dollar that will produce passive income

3) Investment Return

That’s the tricky one, especially if you are not skilled in investing.

It’s intuitive the fact that higher is your Return on your investment (or Yield) higher is your monthly check from the investment…but what is high and what is low?

The easy part…Higher the risk higher the return

The difficult…find a sweet spot between risk and returns

There are 3 or 4 way of investing after tax money…here they are

 

Confusing…?

I bet it is but it might be much more simple than you think…

What’s next

In next post we will go through these difference way of investing…for now just keep in mind that the solution is simple: saving enough money so that the passive income generated by your investment will cover all your expenses.

This is call Financial Independence, i.e. you are independent (free) from working to have your finances covered

To most of the people Financial Independence is like a dream….something not real…something only for very rich people.

Whenever I talked about it most of the people dismiss me with a gentle “whatever“, like I told them they only need to win the first price of the lottery tomorrow to make it.

These are the same people who live a miserable life of paycheck to paycheck slavery…I wonder if there is a connection…

But if reach the end of this post you will not end up like with those people.. I promise you…just wait for next post…