I have no idea what I’m doing, financially. (How to save $100k in five years)

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September 15th, 2015
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I like money. Not in the Dan Bilzerian, “let’s see how ostentatiously I can spend this on boobs, guns and gambling,” kind of way, but in a different way. Earning, saving and using it wisely is measurable and quantifiable. It’s an easy way of tracking progress and “keeping score” when it comes to informing one’s behavior. This post is for people looking to get a better understanding of some of the smarter things that people can do with their money.

Disclaimer. I’m not a banker, a financial analyst, a day trader or an economist. I’m not a mathematician or even a personal finance expert. I’m just a guy who feels like he has the ability to control his finances.

Here’s what you need to know to have more money tomorrow than you have today. Let’s make our goal to have $100,000 (or more!) in savings 5 years from the day you read this post.

Seriously. You can do it.

Let’s begin. We’ll simulate a person living in the wildly expensive SF Bay Area.

Step 1. Get a job.

This is important. Without a job, it’s difficult to earn money. I recommend finding something that you’re good at, and relentlessly (seriously, send out ten applications a day if you have to) applying for jobs doing that.

Step 2. Receive money.

You got a job? Wonderful! Assuming you aren’t working for an exploitative New York nail salon, you should receive some money. The average person with a college degree makes roughly $60,000/year. That’s $300,000 (before taxes) over our five year period.

Step 3. Avoid taxes.

No, we’re not going to break any laws. We’re going to defer some income. The IRS allows you to set aside money for retirement and reduce your taxable income. Here’s how it works (fake tax rates for example).

No deferral: You make $100,000. The government takes 30% from people who make $100,000. You have $70,000 to show for your work.

Deferral: You make $100,000. The government takes 30% from people who make $100,000. Rather than give up $30,000, you set aside $10,000 in a retirement account. The government takes only 25% from people who make $90,000. You have $67,500 to show for your work. Add that to the $10,000 in your retirement account and you have $77,500 to show for the same amount of work as you did in the “no deferral” situation. TLDR: Make $100k, keep $77,500.

That’s it. Simply by setting aside money in a retirement account you have netted an extra $7500. FREE MONEY.

Okay, back to real numbers. We are going to defer the max. That’s $23,500 a year. $18,000 goes to your 401k at work (if you don’t have one, we’ll have to think of something else), $5,500 goes to your traditional IRA.

This reduces your taxable income to $36,500 a year. See below for the breakdown (with real tax rates).

The I’m too lazy to think about money plan (No retirement accounts): $60,000 taxable income. 9.3% California Tax. 25% Federal Tax. That’s 34.3% of your income that goes to the government if you defer nothing. $20,580 per year which means you have $39,420 to show for each years work. That’s $197,100 after five years.

The Wes Plan (Maxing retirement accounts): $36,500 taxable income. 8.0% California Tax. 15% Federal Tax. Now Uncle Sam takes only $8,395 a year, leaving you with $28,105. That’s $140,525 after five years.

Oh yeah, and in TWP, you have $117,500 saved on the side. For a total of $258,025. That’s a difference of $60,925 between the two plans, with the only difference that in Plan 2, some of that money is saved and more difficult (but not impossible) to be spent immediately.

Step 4. Live.

We’re going with Plan 2. Now we just have to live on $140,525 for five years. Let’s go.

  1. Rent. $1,250 a month. That’s enough to rent a room or small studio in many parts of the Bay Area. Want a “nicer” place? Make more money, move, find roommates or suck it up. Five Year Cost: $75,000
  2. Food. $500 a month max. Even in SF, that’s enough to go out to lunch and dinner once a week. Make your own meals as often as possible and repeat basic meals (chicken and rice, eggs + sausage etc). Think of food as an essential part of life instead of a thrice daily treat. Five Year Cost: $30,000
  3. Transportation. Take public transit. It shouldn’t be more than $10 a day. Want a car? Great. You can buy a used Honda Civic for $5000, and fuel it for $5 a day. Let’s bucket another $750 a year for insurance and another $250 for a random repair or maintenance. Five Year Cost with Car: $19,125 on the car, $18,250 with public transit.
  4. Phone, Internet. $110 a month. I pay Comcast $60 a month for internet. You can get a $50/month plan at T-Mobile. No TV. Watch whatever you need over the air or over the internet. Five Year Cost: $6600
  5. Health. Gym + Insurance $120 a month. Five Year Cost: $7,200

Total five year cost for essentials: $137,925.

Surplus: $2600. Spend it on clothing, entertainment, vacation and unforeseen expenses.

Conclusion.

TWP isn’t for everyone. You might not have as swank an apartment as that girl you went to college with (who is living check to check), as nice a car as the guy who dated your sister (who has $100,000 in student loan debt), or take as many trips as the trust funder you knew in high school (who has no control of their spending). But here’s what you will have, over $100,000 in retirement savings. That’s more than DOUBLE the average 35-44 year old American, who has only $42,700 stocked away. You’ll also have something perhaps even more valuable, the ability to control your finances.

I’d like to consider this somewhat of an evolving post, so please, please, let me know if anything on here seems wrong or has the opportunity for improvement. Would a follow up post detailing more about retirement accounts be helpful? Let me know in the comments below.

Happy living.

 

10 Comments:

  1. I hope you talk a bit about ROTH IRAs. I’m a huge fan; mine is from Vanguard. You can take up to $10,000 out to use as a down payment for your first home.

    • Great idea! Definitely on the list for a future post. I considered including it in this but the focus here was really tax deferral and budgeting.

  2. This post is extremely useful…..now how do I translate this over to UK finances ; )

  3. You forgot 3 of my favorites:
    1) write down everything you spend (an app or a spreadsheet) every month. If it’s not in budget for the month, save money this month and buy it next month with the combined budget of two months. If it’s not in budget, you don’t need it. If you have extra, it’s savings.
    2) if you get a bonus, put it in savings. Or spend 25% of it as a reward, and save the other 75% as a long-term reward. When you’ve done this enough, invest it and start saving again.
    3) if you get a raise, see: bonus, above.

    • All great tips! I’ll share my spreadsheet template in a future post 🙂

  4. I presume this is strictly toward SF locals? Otherwise, your figure of $60k for the average college grad is extremely off. Unless you are referring to grads just in the STEM and finance/accounting fields.

    Not trying to be a jerk. I’m legitimately curious on the thinking. I don’t make anywhere near $60k and live in Boston, and I know plenty of grads making less than that as well. Plus many making more. But certainly don’t get the impression, from my acquaintances and national days, that your $60k figure is close. Especially to include the millions still looking for jobs that are grads.

    Obviously the other bits on cost of living are central to SF as you can pay less than most of those costs in non-SF/NYC/LA/DC/Seattle cities.

    Thoughts?

    • Ah – thanks for the comment Avi. Clarification should be that the $60k figure is not for “new” college grads, but all people with college degrees overall. YMMV of course based on region and industry. Will update the post to reflect that distinction.

      • Gotcha – that makes more sense. I am a Spring 2014 grad and reading that definitely threw me off for a moment.

        I was fortunate to be pushed by my accountant dad to work through high school and college and save the whole way through, so I started an IRA my junior year of college. But yes, investing early and often in small sums compiles pretty quickly when you leave the money alone.

        For those who enjoy Reddit, r/personalfinance and r/investing are fantastic resources with plenty of beginner-level material.

        Appreciate the post and glad I found your blog from your pinned tweet 🙂

        Cheers!

        • Sounds like you’re off to a great start – congrats on graduating and starting investing early, the small moves you make now are really setting you up for years of success.

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