Wealth

TL;DR - Wealth is a terrible thing to build a life around but if you don't manage it, it will manage you.

The following are my opinions on wealth and finances, not financial advice. I'm just a random guy on the internet so do your own research.

Overview

How to build wealth

Basically anyone can build wealth with these principles:

• Spend less than you earn - If you can't do this, you're not gonna make it. Debt is a hard hole to climb out of cause you have to pay for the principal AND the interest.
• Save an emergency fund - Build an emergency budget of 3-6 months of your regular expenses. This is important in case the unexpected happens. Unexpected things happen frequently throughout life - layoffs, a health emergency, car breaks down, house floods, etc. Having this buffer between you and debt will take a burden off your shoulders and help you stay solvent if any were to occur (and they typically do, every single year).
• Invest your money - Invest the rest in low cost index funds. Target a 40% savings rate or higher. The more you save and invest the faster your wealth grows. Invested money compounds, saved money typically doesn't - it just keeps up with inflation. Compounding doubles your money every ~15-20 years (at a 5% interest rate) and that's how you build wealth over time - by making the money work for you. Active investing typically doesn't work too well - even top investment firms rarely beat out the market, especially not over the course of several years. Do NOT touch this money if you can - it grows better / faster if you don't take it out.
• Don't forget to enjoy life - Monetary wealth is but one way to live a rich life. Many folks build their lives around it, pinching every penny. For some that's what they really want to do so is okay but for many, that may mean depriving you of things you value. The point of managing money is to be able to allocate more to the areas you actually value. So spend in those areas, just keep track of your finances so you're doing so sustainably.

I'll note that making more money solves a lot of problems. If you aren't making enough to make ends meet then you aren't going to build wealth. So moving to a job / setup where you can increase revenue and reduce costs is always going to be a big lever, no matter where you are on your wealth journey.

On the bright side, there's almost always something you can do to increase your wages. It could be working more hours but that's only sustainable for so long. It will often be changing roles, moving to a different company or industry, or starting some side gigs. It will take extra hours, effort, and strategy but it can be done. Over time, these differences in income can make a huge difference in where you end up.

For a more in-depth essay on building wealth: The Simple (, Long, Short, Boring, Probable) Path to Wealth

Financial Independence

Financial Independence is when you become wealthy enough that you can live on just the interest your money earns from investments. Historically, investments in US stocks have returned ~5% so a withdrawal rate of 4% of your wealth is typically safe to do indefinitely without losing money. I am risk-averse so in my calculations I shoot for a 3% withdrawal rate.

This means that you can figure out how much money you need to save to be financially independent with a simple calculation:

YearlySpend / WithdrawalRate = FIRE Number

Let's use some round numbers to make this easy:

• YearlySpend = $50k
• WithdrawalRate = 4% = 0.04
• FIRE Number = $50_000 / 0.04 = $1,250,000

So if you spend $50k per year, you need $1.25M to reach financial independence.

Note that the number you need for financial independence fluctuates with your annual spend. If you spend more, you need to have saved more to reach financial independence.

This means we can actually calculate how much time it will take to reach financial independence based on your current savings rate. The formula for calculating this is complicated but we can use some helpful calculators to do it for us.

Let's use some round numbers - $100k income, $50k spend = 50% savings rate. We'll use one of my favorite FIRE calculators.

• 50% savings rate, 4% withdrawal - can retire in 16.6 years (calculator)
• 50% savings rate, 3% withdrawal - can retire in 20.1 years (calculator)

Financial Independence and Retirement

I think it's important to point out that this is how sustainable retirement works. We're human and we get old and eventually want (or need) to stop working. Many people just yeet into retirement without a plan thinking they saved up a lot of money. Often times that doesn't work because they never did the math so end up with less money than is sustainable. So they are pressed for cash as they grow older and weaker.

That's not a great place to be in. Not for you and not for those that might be supporting you. So I think it's in everyone's best interest to try to build for financial independence. In the worst case, you save up to help support yourself when you can't work anymore. In the best case you acquire way more money than you needed and can enjoy the excess.

I'm a big believer in Financial Independence because that unlocks a lot of freedom in how you live your life. Personally I don't subscribe to the Retire Early idea. I "retirement" has a lot of baggage and leads people into pits of failure. It sounds like sitting on the beach doing nothing all day but for most people that's not actually fulfilling - at least not for months and years on end. Instead I like the idea of building financial independence and leading life on your terms - that probably means doing some sort of work, but it doesn't have to be a full 9-5.

Perhaps a bigger issue I have with the idea of "retiring" is that it's something you put off. I think a better way to live life is to make everyday so good that you don't have to retire from it. The rest follows.

Todos

• Some links / stats to other essays / posts on wealth I like