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Its important to have a spouse who has a similar desire for sensible frugality. The level of income is less important than simply living below your means for yo

Its important to have a spouse who has a similar desire for sensible frugality. The level of income is less important than simply living below your means for your whole life. With prudent financial planning, compound interest and the passage of time achieves the level of wealth described in the article. Indeed car purchases are a good indicator. An omission of the article is that often frugal persons are generous to their loved ones and causes they care about.

baldfat 11y ago
I have a friend who is a school teacher. He is the most frugal person I know. He paid for his first home by the time he was 29 and than sold that and bought a awesome home that was paid off in 7 years. Most generous person I know. He would give the shirt off his back if need be. Drives his wife nuts :)
briandear 11y ago
Compound interest? Where? The interest rates are such that inflation would destroy whatever gain you have. Nearly all savings accounts are paying an annual yield of less than 1%! That means WITH compounding, you're looking at a 1% or lower gain. Inflation is typically between 1-4%, with 2% being the benchmark in terms of financial planning, though admittedly in April, we had slightly negative inflation, but that trend won't continue. Investing is the only way to build wealth. It's impossible to save your way to financial freedom. If you make an average of $100K per year from age 30-60, that's $3 million in income. Assuming about 35% in state, local and federal taxes, that leaves you with $65K per year. Now, you're saving 10% of that per year, that's $6,500 saved per year. With a 1% rate, at the end of 30 years, you have about $229K. Assuming you live to be 80, that's $229K that needs to earn enough to pay your bills. Even if you saved 20%, you'd still not even have $500K at the end of 30 years. With the same 20% savings rate and some reasonably smart investing (12% returns,) then you'd end up with over $3.5 million over the same period. If that investing is in real estate, you could potentially earn that gain tax free (or tax reduced) because building depreciation percentages can generally exceed the "profit" from real estate cashflow. On top of that, a 1031 exchange means you can keep selling and trading up to larger and larger real estate without paying a capital gains tax, which means you build even more net worth that can then be leveraged to buy more properties. Most millionaires get there because of property, very, very rarely because they save their way to it. A typical middle-class wage doesn't lend itself well to saving your way to millions. The math just doesn't work, the tax code also doesn't support it. Frugality isn't the key to success. The $30 you save by washing your own car is peanuts compared to the value of that time doing something more productive (like sourcing real estate or researching investments.) Frugality can actually cost you more money because of the time-value of money. But admittedly many of us have inherited our parents/grandparents' Depression Era, middle-class ethos. It's a classic example of Rich Dad Poor Dad.
- SlipperySlope 11y ago
  Sorry I was not clear. * Compound interest in this context is ROI after inflation. * Savings in this context is defined as investment, e.g. saving the earnings of one spouse to make the down payment on a rented duplex. * Frugality in this context is defined as delayed or avoided gratification to spare discretionary funds for investment. Relative frugality (not being a spendthrift) is a necessary requirement for holding wealth. It is a key - not the only one - to gaining it.
- vasco 11y ago
  You're delusional if you think 12%/year returns are feasible for a period of time of 30 years for the average (hell, even for very good ones) investor. On the other hand you're also delusional if you think it is that hard to save more than 20% on a $100k salary.
- charlesdm 11y ago
  Compound 'interest' does not necessarily mean interest on T-Bills or in a savings account. It can also mean value appreciation in capital assets (e.g. investments in stocks, property, etc) + dividends. It basically means that any capital asset compounds in value over many years. Let's say the stock market, on average, loses 30-40% in a down year. On the other hand, you usually have 5-7 good years between crashes, where the market appreciates by 10-30% per year. Even if you can't liquidate your stock holdings 'when shit hits the fan', you'll still be making money. Achieving a 20%+ return is realistic if you don't mind taking some risk (not crazy "seed fund a startup" risk, more like general business risk) and you make sure to minimise your taxes. The stock market has been BOOMING for the last 5 years. I have a wealthy friend who told me his net worth doubled over the last 5 years. That's tens of millions in capital growth.
- ndonnellan 11y ago
  I agree with vasco that 12% is a very large expectation for compound interest. In the early-retirement community 7% (before inflation) is a good benchmark over long periods of time. However, your tax assumptions are probably too high for the current environment. If you earn 100k gross, but max out your 401k and HSA, your net income after taxes will be close to 60k, but you'll already be saving 20k+ pre-tax. Yes, you'll have to pay taxes on the 401k when you reach retirement, but if you're living frugally and only taking out a small amount, your tax obligations will be way less than 35%. Without breaking a sweat, my effective tax rate is under 16% and I'm in the range described.

baldfat 11y ago

I have a friend who is a school teacher. He is the most frugal person I know. He paid for his first home by the time he was 29 and than sold that and bought a awesome home that was paid off in 7 years. Most generous person I know. He would give the shirt off his back if need be. Drives his wife nuts :)

briandear 11y ago

Compound interest? Where? The interest rates are such that inflation would destroy whatever gain you have. Nearly all savings accounts are paying an annual yield of less than 1%! That means WITH compounding, you're looking at a 1% or lower gain. Inflation is typically between 1-4%, with 2% being the benchmark in terms of financial planning, though admittedly in April, we had slightly negative inflation, but that trend won't continue. Investing is the only way to build wealth. It's impossible to save your way to financial freedom. If you make an average of $100K per year from age 30-60, that's $3 million in income. Assuming about 35% in state, local and federal taxes, that leaves you with $65K per year. Now, you're saving 10% of that per year, that's $6,500 saved per year. With a 1% rate, at the end of 30 years, you have about $229K. Assuming you live to be 80, that's $229K that needs to earn enough to pay your bills. Even if you saved 20%, you'd still not even have $500K at the end of 30 years. With the same 20% savings rate and some reasonably smart investing (12% returns,) then you'd end up with over $3.5 million over the same period. If that investing is in real estate, you could potentially earn that gain tax free (or tax reduced) because building depreciation percentages can generally exceed the "profit" from real estate cashflow. On top of that, a 1031 exchange means you can keep selling and trading up to larger and larger real estate without paying a capital gains tax, which means you build even more net worth that can then be leveraged to buy more properties. Most millionaires get there because of property, very, very rarely because they save their way to it. A typical middle-class wage doesn't lend itself well to saving your way to millions. The math just doesn't work, the tax code also doesn't support it. Frugality isn't the key to success. The $30 you save by washing your own car is peanuts compared to the value of that time doing something more productive (like sourcing real estate or researching investments.) Frugality can actually cost you more money because of the time-value of money. But admittedly many of us have inherited our parents/grandparents' Depression Era, middle-class ethos. It's a classic example of Rich Dad Poor Dad.

SlipperySlope 11y ago
Sorry I was not clear. * Compound interest in this context is ROI after inflation. * Savings in this context is defined as investment, e.g. saving the earnings of one spouse to make the down payment on a rented duplex. * Frugality in this context is defined as delayed or avoided gratification to spare discretionary funds for investment. Relative frugality (not being a spendthrift) is a necessary requirement for holding wealth. It is a key - not the only one - to gaining it.
vasco 11y ago
You're delusional if you think 12%/year returns are feasible for a period of time of 30 years for the average (hell, even for very good ones) investor. On the other hand you're also delusional if you think it is that hard to save more than 20% on a $100k salary.
charlesdm 11y ago
Compound 'interest' does not necessarily mean interest on T-Bills or in a savings account. It can also mean value appreciation in capital assets (e.g. investments in stocks, property, etc) + dividends. It basically means that any capital asset compounds in value over many years. Let's say the stock market, on average, loses 30-40% in a down year. On the other hand, you usually have 5-7 good years between crashes, where the market appreciates by 10-30% per year. Even if you can't liquidate your stock holdings 'when shit hits the fan', you'll still be making money. Achieving a 20%+ return is realistic if you don't mind taking some risk (not crazy "seed fund a startup" risk, more like general business risk) and you make sure to minimise your taxes. The stock market has been BOOMING for the last 5 years. I have a wealthy friend who told me his net worth doubled over the last 5 years. That's tens of millions in capital growth.
ndonnellan 11y ago
I agree with vasco that 12% is a very large expectation for compound interest. In the early-retirement community 7% (before inflation) is a good benchmark over long periods of time. However, your tax assumptions are probably too high for the current environment. If you earn 100k gross, but max out your 401k and HSA, your net income after taxes will be close to 60k, but you'll already be saving 20k+ pre-tax. Yes, you'll have to pay taxes on the 401k when you reach retirement, but if you're living frugally and only taking out a small amount, your tax obligations will be way less than 35%. Without breaking a sweat, my effective tax rate is under 16% and I'm in the range described.