Live on Half and Forget the Rest

Here at LiveFreeMD we don’t just want you to keep up.  We don’t just want you to be average.  We want you to get ahead.  Way ahead.  I’ve mentioned this a few times in prior posts, but it is worth an entire post because it is so important.  In order to win financially, you will need to save a very large portion of your income.

I throw out the number 50%, because if you can save half of your income, you will become financially independent in around 15 years assuming a modest 5% rate of return and a 4% withdrawal rate. If you choose a seemingly more manageable savings rate, such as 20%, you are destined to work around 40 years.  That is NOT my definition of freedom.

For a full discussion of various savings rates and time to financial freedom, see this post by Mr. Money Mustache, which is much better than anything I could have created on my own.

A 50% savings rate may seem daunting, but I am going to outline how it is possible (or not possible) at various income levels.

Lower Middle Class: household income $30,000 per year

This may apply to a two-earner household working minimum wage jobs, or a single-earner household earning a lower entry level teacher income.  In order to save 50% of your income, you would need to be able to live off of 15,000 per year.  This is near the federal poverty level, and I would argue that this is unrealistic.  If your household income is around $30,000 per year, you need to focus on improving your income if you ever want to be financially independent.  Luckily, there are several fantastic jobs that deliver a salary near 60K and don’t require an extensive education.  These include dental hygienists, web developers, associates level RNs, and radiology technicians.  Do some research, buckle down for a year or two of training, and then get out there and enjoy a larger income.

Middle Class: household income $60,000 per year

In 2015, the median household income in the United States was $56,000 per year.  At this income level, you need to be able to live on approximately $30,000 per year.  If you are married without children in a low cost of living area, this would certainly be manageable.  You will be living in a modest apartment and driving a $5,000 used car. On the other hand, if you are single, with 3 children and living in San Francisco, this will be impossible.

Evaluate your situation and determine whether $30,000 per year is feasible or not feasible.  If it is not feasible, you will either need to move to a lower cost of living area or increase your income.  To get into the upper income ranges approaching 6 figures, you will need to either have a marketable skill such as sales, web design or real estate investing, or you will need to go back to school for a professional degree, such as engineering or accounting.  Of course, some people with an entrepreneurial spirit are able to make over 6 figures online, such as Millenial Money Man, but this may be more of an anomaly than the norm.

Upper Middle Class: household income 100,000 per year

Once you get into this income range, which I consider the sweet spot, it is relatively clear sailing for financial independence. You make enough to be comfortable, but not so much that half your income is obliterated by taxes.  Nonetheless, you will likely pay around 15K in taxes, so to save 50K per year, you will need to live on around 40K.  Living on $40K per year is manageable for most people in most living situations, in most areas of the country.  There will always be exceptions of course.   My wife and I reside in Anchorage, AK, a relatively high cost of living area, and live on approximately $50K relatively comfortably.

As your income increases, your tax rate will also increase which will make saving the requisite 50K more difficult, but at this income range, there are ways to significantly reduce your tax rate.  Check out how Justin from Root of Good was able to pay almost no income tax on a $150,000 household income.

If this level of income still isn’t enough for your savings goals or lifestyle desires, then you either need to start a successful business, or enter a professional field with more advanced training, such as law or medicine.  Of course you definitely need to consider the return on investment with some of these advanced degree programs.  It’s not as lucrative as it may seem.

Upper Class: Household Income >200K per year

At this income range, the law of diminishing returns kicks in. Taxes are higher, deductions phase out, and the number of work hours, stress, and responsibility often increases. At a median household income around 200K per year, you will pay at least 30-50K in taxes, so to save half of your income, you will need to live on around 50-70K per year.  This is manageable in all but the most exclusive areas such as Manhattan or San Francisco.  If you get to this income range, you have the opportunity to live on less, save greater than 50% of your income, and gain your freedom within ten years. For an excellent analysis of how this might work, check out A Tale of 4 Physicians by Physician on Fire.

Bottom Line

Ignore the typical recommendations to save 10-20% of your income.  You need to save 50%.  Live like you only make half of what you actually make.  Max out your 401k so you never see the income hit your bank account.  Then, the very day your paycheck hits your checking account, immediately take half (minus what was placed into your 401k) and pay off high-interest loans, contribute to your Roth IRA, build up your emergency fund, or contribute to your taxable investment account.  Spend what’s left in your checking account over the next month, and forget about the rest. The rest is your future.

What do you think?  What percent of your income do you save?  How do you reduce the effect of taxes to make saving 50% more manegeable?  How have you increased your income?

Remember, it’s Not About the Money; It’s About the Freedom